LIBRARY 

OF   T1IK 

University  of  California. 

Gl  FT    OF 


CAzss 


REPORT 


OF  THE 


COMMISSION  ON  REVENUE  AND  TAXATION 


OF  THE 


STATE  OF  CALIFORNIA. 


1906. 


GEORGE  C.  PARDEE,  Governor,      ---------     Chairman. 

J.  B.  CURTIN  and  H.  L.  WARD,    -    -    - State  Senators. 

H.  S.  G.  McCARTNEY  and  E.  F.  TREADWELL,     -    -    -    Assemblymen. 
CARL  C.  PLEHN,   Expert  on  Taxation  and  Public  Finance,     -    Secretary. 


or  THf 

UNIVERSITY 

OF 


W.  'W.    SHANNON, 


SACRAMENTO: 

:       :       SUPERINTENDENT    OF    STATE    PRINTING. 
1906 


TABLE  OF  CONTENTS. 


Page. 

LETTER  OF  TRANSMITTAL - ---- 1 

INTRODUCTION 3 

Objects  of  the  commission  ...... - --- 3 

Appointment  and  organization  of  the  commission 4 

Meetings •■-- 4 

The  extent  of  the  commission's  work - 4 

The  preliminary  report --- 5 

Why  a  preliminary  report  was  published - 5 

Results  of  the  publication  of  the  preliminary  report 5 

Nature  of  the  information  furnished  by  corporations - 5 

Hearings - --- ---  6 

The  recommendations  are  not  untried  novelties 6 

PART  I.     ENUMERATION   OF   CONCLUSIONS  AND  RECOM- 
MENDATIONS. 

SECTION  I.    THE  FINDINGS .-.. 9 

A.  Faults  in  the  old  system - -  9 

1.  Antiquated — -- 9 

2.  Inequalities --   - -  9 

3.  Farmers  overtaxed --- 9 

4.  Excessive  burden  on  real  estate - 9 

5.  Personal  property  assessment  stationary - 9 

6.  Money  and  credits  escape -- 9 

7.  National  banks  untaxed - 9 

8.  State  commercial  banks  handicapped 10 

9.  State  commercial  banks  evade  taxes 10 

10.  Savings  banks  fully  taxed 10 

11.  Equalization  fails  to  equalize - 10 

12.  Inequalities  intensified  by  many  rates 10 

13.  Poor  counties  suffer --  10 

14.  Counties  rob  the  State  of  revenues  peculiarly  its  own ...   10 

15.  Inequalities  between  corporations 10 

16.  A  "school  for  perjury  "  --- 10 

Constitutional  restrictions 10 

B.  Remedies  11 

1.  Separation  of  State  from  local  taxation 11 

2.  Absolute  separation  the  ultimate  aim 11 

3.  The  proposed  sources  of  State  revenue -- 11 

a.  Old  sources  continued 11 

b.  New  sources - 12 

4.  The  solution  of  the  question  of  the  taxation  of  franchises 12 

Estimate  ok  State  revenues  under  the  Commission's  plan 13 


158619 


IV  CONTENTS. 

SECTION  II.    THE  CONSTITUTIONAL  AMENDMENT 14 

Separation  prohibited 14 

Income  tax 14 

The  point-  in  proposed  amendment 15 

The  proposed  amendment .. 15 

Notes  on  proposed  amendment 21 


PART   II.      DISCUSSION    OF    THE    PRESENT    SYSTEM    OF 
TAXATION. 

CHAPTER  I.     ANALYSIS  OF  THE  PRESENT  REVENUES  OF  THE  STATE..  25 

Sources  upon  which  the  analysis  is  based 25 

Condense!  statement  of  the  revenues  of  the  State,  table 25 

Detailed  analysis  of  the  revenues  of  the  State,  tables: 

A.  Taxes - 26 

B.  Fees 26 

C.  Collections  by  State  boards  and  institutions 26 

D.  Earnings  of  State  property  and  investments    27 

E.  Commercial  or  quasi-commercial  earnings 27 

F.  Saleof  State  lands 27 

G.  Gifts  and  escheats 27 

H.  Miscellaneous 27 

School  moneys  not  properly  State  revenues 27 

Final  resum6 28 

The  necessary  cost  of  the  State  government 28 

New  sources  of  revenue - 2<J 

The  tax  on  insurance  premiums 29 

The  taxation  of  inheritances ...  30 

The  annual  license  tax  on  corporations 30 

CHAPTER  II.     ANALYSIS  OF   THE   REVENUE   LAWS   OF  CALIFORNIA, 

WITH  COMMENTS  ON  THEIR  OPERATION 31 

Classification  of  revenue  laws 31 

A.   Taxes 31 

I.  The  general  property  tax 31 

Annual  assessment  of  real  estate  unnecessary 32 

Separate  municipal  assessment  unnecessary 32 

The  assessment  of  property,  table 33 

Per  capita  assessed  valuation  and  taxes,  table 34 

The  assessment  roll 34 

Chart,  showing  assessed  valuation,  1850-1904 35 

Abstract  of  the  principal  provisions  of  the  laws  regarding  the  general 

property  tax 36 

l.  Property  snbjecl  to  this  tax 36 

a.  Definition  and  classification  for  purposes  of  taxation 36 

Property  exempt  from  taxation  by  provision  of  the  Constitution..  37 


CONTENTS.  v 

CHAPTER  II.    ANALYSIS  OF  REVENUE  LAWS- Continued. 

38 

b.  Assessment  or  valuation - 

on 

Assessment  of  railroad  property,. - 

•  ■  39 

Miscellaneous  provisions --- -- 

40 
Deduction  of  debts - 

Shares  of  stock  in  corporation --    40 

Telegraph  and  telephone  lines --- 

41 
Car  companies - 

Vessels 

Franchises 

42 

c.  Equalization - -  

43 

2.  The  rate 

43 
Average  tax  rates - - 

44 

3.  Collection - - — 

45 
Delinquent  tax  lands.. - - 

One  million  acres  delinquent  lands ---    *° 

Delinquent  forestable  lands ^ 

Delinquent  agricultural  lands 

47 
Possible  remedies - - - - 

47 
Railroad  taxes - 

The  taxation  of  forest  lands ' 

47 
II.  Poll  tax... 

County  poll  taxes - - 

III.  The  inheritance  tax 

49 

IV.  Corporation  taxes — 

49 
Insurance  companies - -- ■*— 

50 
V.  Business  taxes  and  licenses.. - - 

VI.  Income  tax. 

51 
B.  Sources  of  revenue  other  than  taxes 

1.  Fees,  etc.,  collected  by  State  officers - 51 

2.  Collections  by  State  boards  and  institutions - ---  52 

3.  Income  from  the  rental  of  State  property 52 

4.  Commercial  or  quasi-commercial  earnings ---  53 

5.  Income  from  the  sale  of  State  lands 53 

6.  Income  from  "gifts,"  "escheats,"  etc 53 


CHAPTER   III.      INEQUALITIES   IN    THE    EXISTING  SYSTEM   OF    TAX- 
ATION   M 

54 
The  increase  in  the  tax  burden. - - 

54 
An  antiquated  system - 

A.  Failure  to  reach  personal  property -- 

The  assessment  of  money  and  solvent  credits,  and  table - 56 

The  assessment  of  other  forms  of  personal  property - 5' 

-,^ 
The  assessment  of  franchises 

59 
Miscellaneous  items - - 


VI  CONTENTS. 

CHAPTER  111.     INEQUALITIES  IN   EXISTING  SYSTEM— Continue!. 

1'..  Inequalities  in  tin-  asseument  of  real  estate 60 

Inequalities  between  different  localities 60 

Table,  true  value  compared  with  assessed  value,  nineteen  cities t;i 

Initialization  fails  to  equalize 61 

Effect  of  unequal  valuations,  table 62 

Cause  of  these  Inequalities 62 

Inequalities  between  rural  and  urban  property 63 

Summary  of  farm  taxation  at  the  present  time 65 

Table  of  comparison  of  farm  taxes  and  taxes  on  manufactures 65 

Comment  on  foregoing  table - 66 

Taxation  of  real  estate  in  cities  and  in  the  country 66 

Inequalities  between  different  classes  of  corporations 68 

CHAPTER  IV.    CITY  TAXES  IX  CALIFORNIA 69 

Separate  city  assessment  and  collection  an  unnecessary  waste 69 

Origin  of  this  extravagance 69 

Table:  City  taxes  in  California 70 

Taxation  in  San  Francisco 72 

Table:  Assessed  values  City  and  County  of  San  Francisco,  1850-1906 73 

Chart  of  assessed  valuations  In  San  Francisco 73 


PART  III.     PROPOSALS  AND  RECOMMENDATIONS. 

CHAPTER  I.    SEPARATIOX  IN  GENERAL.. 77 

Introduction  and  definition 77 

Theoretical  considerations 79 

Practical  considerations 81 

Separation  in  other  states 82 

Illustrations  of  the  effects  of  separation  in  different  states 83 

New  York 83 

Pennsylvania •.. 83 

Connecticut 84 

Ohio 84 

Minnesota 85 

CHAPTER  II.     SEPARATION  IN  CALIFORNIA  86 

Recommendation        - 86 

Summary  of  estimated  effects  of  separation 87 

How  the  effects  are  computed 87 

.Separation  for  the  common  good 88 

Discussion  of  table  showing  gain  or  loss  by  counties 88 

Table •-.. 89 

CHAPTER  III.    GROSS  EARNINGS  TAXES   IN  THEORY  AND  PRACTICE..  91 

GrOBS  earnings  tax  recommended 91 

Theory  demands  nel  earnings  tax      91 

Practical  difficulties  of  net  earnings  tax  are  insuperable 91 


CONTENTS.  Vll 

CHAPTER  III.    GROSS  EARNINGS  TAXES  IN  THEORY,  ETC.— Continued. 

The  justice  and  equality  of  a  gross  earnings  tax 92 

Practical  advantage  of  a  gross  earnings  tax 92 

Determination  of  rates  for  gross  earnings  tax 93 

Equal  taxation — - 93 

Classification  of  corporations - 94 

Computing  the  tax  rate 95 

Net  earnings  denned . 95 

Rents  or  rental  charges  not  operating  expenses.. 96 

Annual  payments  on  account  of  the  franchise 96 

Reports  made  to  the  Commission 97 

Earnings  of  similar  companies  outside  of  California.. 97 

The  rate  of  capitalization 98 

The  rate  on  property 98 

Chart  for  computing  the  rate  on  gross  earnings  100 

Nomograph  for  computing  equivalent  tax  rates 101 

CHAPTER  IV.     TAXATION  OF  RAILROADS 103 

A.  Taxation  of  railroads  in  California 103 

The  present  system 103 

Table  of  taxes  paid  by  California  steam  railroads  in  1904 104 

Historical  survey 105 

Table  showing  assessment  by  the  State  Board  of  Equalization  1880-1906..  107 

Table  showing  •'original"  and  "re"-assessments,  1880-1887 108 

Table  showing  receipts  of  taxes  levied  on  assessment  of  railroads  by  State 
Board - 109 

B.  Taxation  of  railroads  in  other  states 109 

Bibliographical  note 109 

Table  showing  taxes  paid  by  railroads  in  each  State  in  the  Union... 110 

I.    The  general  property  tax  on  railroads.-- 112 

II.    Taxes  based  on  capital  stock,  etc 113 

Connecticut 113 

Massachusetts 113 

Pennsylvania 116 

III.    Taxes  based  on  earnings 116 

Summary „ 117 

Constitutionality  of  tax  on  gross  receipts 117 

1.  Gross  earnings  tax  as  principal  tax 127 

Maine 127 

Maryland 127 

Minnesota 127 

Vermont 129 

2.  Tin'  (truss  earnings  tax  as  a  supplementary  t<ix 129 

New  York 129 

Ohio 129 

Pennsylvania 130 


Vlll  CONTENTS. 

OHAPTEB  IV.    taxation  OF  RAILROADS— Continued. 

3.  The  repeal  of  the  gross  earnings  tax  in  Michigan  and  Wisconsin  ...  130 

Michigan    131 

Michigan  mil  mud  appraisal 136 

Chicago  and  Northwestern 139 

Table  comparing  taxes  Levied  on  ad  valorem  plan  with  those 
levied  on  gross  earnings 140 

Wisconsin 141 

4.  The  introduction  of  the  gross  comings  uix  in  Virginia 1 1". 

Virginia 143 

5.  Partial  gross  earnings  taxes 144 

Texas 144 

Illinois 145 

6.  Taxation  <>f  railroads  in  New  York  anil  .\<->r  Jersey 1 l"> 

New  York 14."> 

New  Jersey  reform  movement 147 

IV.  Summary  of  the  foregoing  analysis  of  railroad  taxation  in  other  states..  148 

1.  The  Connecticut  system,  tax  based  on  stock  and  bonds 1 19 

Table  giving  estimate  of  the  value  of  the  Southern  Pacific 
Company's  railroad  system  in  California  on  stock  and  bond 
basis 152 

Table  giving  estimate  of  the  Santa  F6  system  in  California  on 
the  stock  and  bond  basis 152 

2.  The  taxation  of  railroads  on  an  ad  valorem   basis,   Michigan   and 

Wisconsin  plan 153 

3.  To  ration  based  on  earnings 155 

Taxation  of  net  earnings 155 

Analysis  of  income  account  of  a  railroad.. 156 

Objections  to  net  earnings  tax 157 

Advantages  of  gross  earnings  tax 159 

Tendency  of  ad  valorem  tax  to  become  stationary;  of  a  gross 
earnings  tax  to  advance  in  yield 160 

Table  comparing  gross  earnings  tax  with  property  tax  in  Illinois  160 

Table  showing  growth  of  gross  earnings  tax  in  Minnesota 161 

Chart  illustrating  the  table  for  Minnesota 161 

Table  showing  growth  of  gross  earnings  tax  in  Wisconsin L62 

Chart  illustrating  the  table  for  Wisconsin  _ 163 

The  ad  valorem  tax  in  Michigan  and  Wisconsin 162 

(ii'uss  earnings  are  definite  [acts 164 

Table  showing  growth  of  gross  earnings  of  railroads  in  United 
Slates li;i 

Table  comparing  fluctuations  in  taxes  paid  each  year  by  rail- 
roads mi  Pacific  slope  with  an  assumed  gross  earnings  tax...  165 

Table  of  gross  earnings  of  California   railroads p;t; 

Table  comparing  taxes  paid  by  California  inter-county  road- 
wit  li  assumed  1  [  tax  on  gross  earnings 167 

Equity  of  gross  earnings  tax  as  between  different  roads 107 

Proportion  between  net  and  gross  earning-  of  railroads 168 

Table  showing  proportion  of  taxes  now  paid  in  California  by 
different  railroad  systems  and  the  proportion  which  would 
be  paid  with  gross  earnings   tax 170 


CONTENTS.  IX 

CHAPTER  IV.    TAXATION  OF  RAILROADS— Continued. 

Definition  of  gross  earnings... - ---  171 

Maine ---  I'l 

Minnesota - 171 

Discussion  of  the  definitions - 171 

Approved  definition 174 

Definition  of  mileage ---  174 

The  relative  effect  of  a  gross  earnings  tax  on  different  railroads 

in  California - 174 

Tabic  comparing  present  and  proposed  system  in  its  effect  on 

different  roads - --- 176 

Gross  earnings  and  net  earnings  and  mileage  California  rail- 
roads, 1903-1905 - - - ----  177 

Table  showing  ratio  of  net  earnings  to  gross  earnings,  per- 
centage of  all  taxes  paid  to  gross  earnings - 178 

Summary  of  the  tables. --- 178 

Conclusion - - 1§0 

The  rate -- -- I80 


CHAPTER  V.    TAXATION  OF  PUBLIC-SERVICE  CORPORATIONS  OTHER 

THAN  RAILROADS - 182 

Section  1.    Taxation  of  street  railroads. - 182 

As  subject  for  State  taxation - 182 

Property  tax  inapplicable 183 

The  gross  earnings  tax -- 184 

The  rate  of  the  gross  earnings  tax - 184 

Ratio  of  net  earnings  to  gross  earnings -- -  184 

Criticism  of  figures  of  table 185 

Depreciation  in  street  railroad  accounts 186 

Net  earnings  after  allowance  for  depreciation -- 188 

Increase  in  earnings  and  in  value  of  the  franchises - - 189 

Earnings  per  mile  of  road. - 190 

Taxes  now  paid 190 

Taxation  of  street  railroads  in  different  states - --  190 

Conclusion  as  to  the  tax  rate  for  street  railroads 191 

Recapitulation  and  recommendations  - - - 191 

The  annual  contract  payments  for  the  franchises 192 

Section  2.    The  taxation  of  express  companies 192 

Definition - -.192 

Taxes  now  paid -- 193 

License  taxes - 193 

Inadequacy  of  the  property  tax  as  applied  to  express  companies 193 

The  gross  earnings  tax 194 

Taxation  of  express  companies  in  different  states 194 

The  rate  for  the  tax  on  gross  earnings 195 

2 


X  '  ONTKNTS. 

CHAPTER  V.     TAXATION   OF  PUBLIC-SERVICE  CORPORATION'S  OTHER 
THAN   RAILROADS    -Cbntfi vued. 

CIOH    '■'■■       TH»  TAXATIOH    n|-   car  COMPANIES 196 

The  present  Bystem 196 

Table  of  assessed  valuations 196 

Earnings  of  car  companies - 197 

1 1 ion  of  car  companies  in  other  states lm 

The  constitutionality  of  a  gross  earnings  tax 199 

Objections  raised  by  the  Pullman  Company 199 

noN  i.    Taxation  of  telegraph  and  telephone  companies 201 

Number  and  nature  of  these  companies...  201 

Local  license 202 

Payments  rendered  for  granting  of  franchises 203 

Proper  subjects  for  Si  air  taxation 203 

Taxation  of  telegraph  companies  in  other  states 203 

Taxation  of  telephone  companies  in  other  states 205 

Summary  of  foregoing  tables 206 

Earnings  of  telegraph  and  telephone  companies 206 

Division  of  net  earnings - --- 207 

Conclusions -- - - 208 

Constitutionality  of  a  gross  earnings  tax  on  telegraph  companies 209 

Section  5.    Taxation  of  light,  heat,  and  power  companies 210 

Percentage  of  operating  expenses - 210 

Companies  claim  heavy  depreciation  -.- 211 

Application  of  depreciation  charges..- 212 

Gross  earnings  tax 213 

Use  of  the  "investment"  to  determine  the  rate -  213 

Taxes  now  paid - 215 

Taxation  of  light,  heat,  and  power  companies  in  different  states. 215 

Hon  li.      Taxation  of  OTHER  public-service  corporations 215 

Water  companies ---  215 

Not  suitable  subjects  for  State  taxation 216 

Oil  pipe-line  companies • - 216 

General  remarks 216 

Railroad  interests  in  the  oil  industry 217 

Pipe-lines 217 

Transportation - - —  218 

Conclusions --- 218 

CHAPTEB  VI.     BANK  TAXES 219 

A.    Taxation  of  banks  under  the  present  system 219 

1  otroduction ---  219 

I.  Analysis   of   the  present  law,  with  special  reference  to  State  com- 

in. Trial  bank- - 220 

1.  Ural  .state 220 

2.  Personal  property - 221 

■  i.  Furniture  and  fixtures 22] 

I,.   Stock-,  bond,  ami  warrants - 221 

r.    Money 222 

<!.  Solvent  credits -  222 

..   Franchise 223 


CONTENTS.  XI 

CHAPTER  VI.     BANK  TAXES— Continued. 

II.  Taxation  of  savings  banks 225 

III.  Taxation  of  national  banks . 226 

a.  Points  decided  by  the  federal  courts,  with  reference  to  the  tax- 
ation of  national  banks  by  the  states 230 

IV.  The  present  burden  of  taxation  on  the  banks 235 

Tables  showing  net  earnings  in  various  states 237 

V.  Special  incongruities  and  difficulties  arising  from  the  present  system..  239 

B.  The  taxation  of  banks  in  other  states 240 

Illustrative  citations  from  the  laws  of  different  states 241 

C.  The  plan  proposed  by  the  Commission  for  the  taxation  of  banks  in  California 244 

General  conclusion 249 

D.  Statistical  investigation  by  the  Commission 250 

Table  of  assessed  valuation,  taxes  paid  and  proposed  taxes.. 251 

Form  used  for  inquiries 252 

CHAPTER  VII.    TAXATION  OF  INSURANCE  COMPANIES 254 

Present  taxes  are  not  uniform 254 

Local  licenses 255 

The  necessity  for  State  control  of  taxation  for  insurance  companies 256 

The  extent  of  the  insurance  industry. 256 

The  amount  of  taxes  paid  under  the  present  system 257 

Arguments  by  insurance  companies  against  any  taxation 257 

The  proper  method  of  taxation. 258 

The  rate  of  a  tax  on  gross  premiums 259 

The  rate  recommended 259 

Taxation  of  insurance  companies  in  other  states 260 

CHAPTER  VIII.    TAXATION  OF  FRANCHISES 262 

Nature  of  corporate  franchises 262 

The  franchise  to  be 262 

Fees  for  filing  articles  of  incorporation 262 

Fees  in  other  states 262 

Taxation  of  the  franchise  "to  do" 264 

Annual  franchise  tax  in  other  states 265 

Taxation  of  special  and  general  franchises 266 

Every  corporation  has  a  franchise  taxable  as  property  267 

M'-thodof  taxing  special  franchises  in  California 268 

Taxation  of  corporate  franchises  in  general 266 

Difference  between  these  two  franchises 269 

The  taxation  of  franchises  a  serious  question 269 

The  condition  unsatisfactory 270 

Popular  demand  for  the  taxation  of  franchises 270 

Taxation  can  not  be  used  to  indemnify  cities  for  past  mistakes 270 

The  solution 271 


XI  CONTKNTS. 

CHAP  UK   IX.     TAXATION  OF  MONEY  AND  CREDITS 272 

The  Constitution  requires  the  taxation  of  money  and  credits.. 272 

Table  Bhowing  percentage  of  money  and  solvent  credits 272 

Origin  of  the  attempt  to  tax  money  and  credits 273 

Experience  of  other  states 273 

"  Tax  inquisitors"  in  Ohio 273 

False  swearing  in  taxpayers'  returns 274 

The  reason  for  the  failure  to  tax  money 274 

The  true  principle  illustrated  by  California  mortgage  tax 275 

\  tax  on  money  will  he  shifted 275 

Credits  not  property  in  the  economic  sense... 27fl 

The  property  tax  a  tax  on  things,  not  persons 277 

Objections  to  the  foregoing  view 278 

No  inequality  in  not  taxing  credits 278 

The  Wisconsin  Tax  Commission  reporting  on  credits 27!t 

If  the  law  is  a  dead  letter  should  it  be  repealed? 279 

The  deduction  of  debts  a  failure 279 

Shifting  of  the  tax  can  not  be  prevented  by  law 281 

Recommendation  postponed 281 

This  recommendation  not  urged  at  the  present  time 282 

CHAPTER  X.    THE  COST  OF  COLLECTING  TAXES 283 

Items  entering  into  the  cost  of  collecting  taxes 283 

Where  a  saving  is  possible.     Biennial  revaluation  of  real  property. 283 

Table  showing  cost  of  assessing  and  collecting  taxes 285 

CHAPTER  XI.     STATE   LICENSE  TAXES 286 

License  taxes  used  as  sources  of  State  revenue 286 

No  specific  recommendations  made  in  regard  to  license  taxes 287 

Time  not  ripe  for  general  license  tax  system  in  California 287 

Taxes  on  the  business  of  dealing  in  liquors 287 

State  liquor  taxes  will  not  interfere  with  local  control 288 

New  York  liquor  tax  law  recommended  as  a  model 288 

Definitions,  grades  of  licenses,  and  rates 288 


Office  of  the 
Commission  on  Revenue  and  Taxation, 
2308  Warring  Street, 
Berkeley. 


December,  1906 


To  the  Senate  and  Assembly, 

Gentlemen:  The  Commission  constituted  in  accordance  with  the 
act  of  the  thirty-sixth  session  of  the  Legislature  of  the  State  of  Cali- 
fornia, approved  March  20,  1905,  to  investigate  the  system  of  revenue 
and  taxation  in  force  in  this  State  and  to  recommend  a  plan  for  the 
revision  and  reform  thereof,  has  the  honor  to  submit  its  report. 

GOVERNOR  GEORGE  C.  PARDEE, 

Chairman. 

J.  B.  CURTIN, 

M.  L.  WARD,     P 

State  Senators. 

h.  s.  g.  McCartney, 

E.  F.  TREADWELL. 
Assemblymen. 

CARL  C.  PLEHX, 

(Expert  on  Taxation  and  Public  Finance), 

Secretary. 


INTRODUCTION. 


Objects  of  the  Commission. 

The  objects  and  purposes  of  the  Commission  are  set  forth  in  the  Act 
under  which  it  was  organized,  which  is  as  follows: 

[Statutes  of  1905.] 

CHAPTER  CCCXXXIV. — An  act  authorizing  the  Governor  to  appoint  an  expert  in 
taxation  and  public  finance,  to  sit  as  a  member  of  a  commission  to  be  composed 
of  himself  and  a  general  committee  of  the  Senate  and  Assembly  of  the  thirty-sixth 
session  of  the  legislature  of  the  State  of  California,  of  which  commission  the 
Governor  shall  be  ex-officio  a  member  and  chairman,  to  investigate  the  system  of 
revenue  and  taxation  in  force  in  this  State,  and  to  recommend  a  plan  for  the 
revision  and  reform  thereof;  to  provide  for  the  creation  of  said  commission,  and 
to  define  its  powers,  and  making  an  appropriation  therefor. 

[Approved  March  20,  1905.] 

The  people  of  the  State  of  California,  represented  in  Senate  and  Assembly,  do  enact 

as  follows: 

Section  1.  If  and  when  the  Senate  and  Assembly  of  the  thirty-sixth  session  of 
the  legislature  of  the  State  of  California  shall  provide  for  the  appointment,  and 
there  shall  be  appointed  pursuant  to  said  provision,  a  joint  committee  of  said  Senate 
and  Assembly  to  investigate  the  system  of  revenue  and  taxation  in  force  in  this 
State,  and  to  recommend  a  plan  for  the  revision  and  reform  thereof,  the  Governor 
is  authorized  to  appoint  an  expert  in  taxation  and  public  finance,  to  sit  with  said 
committee,  and  with  said  committee  to  constitute  a  commission  upon  the  revision 
and  reform  of  the  system  of  revenue  and  taxation  in  force  in  this  State.  The 
Governor  shall  be  ex-officio  a  member  of  said  commission  and  shall  be  chairman 
thereof. 

Sec.  2.     Said  expert  shall  hold  his  office  at  the  pleasure  of  the  Governor. 

Sec.  ."!.  The  compensation  of  said  expert  shall  be  fixed  by  the  said  commission 
in  an  amount  not  to  exceed  two  hundred  and  fifty  dollars  per  month. 

Sec.  4.  Said  commission  is  authorized  and  empowered  to  do  any  and  all  things 
necessary  to  make  a  full  and  complete  investigation  of  the  matters  and  things  here- 
inabove enumerated,  and  to  that  end  to  employ  all  necessary  clerical  and  expert 
assistance,  and  that  said  commission  be  and  it  hereby  is  authorized  and  empowered 
to  send  for  persons  and  papers,  and  to  take  all  necessary  means  to  procure  the 
attendance  of  witnesses  and  testimony  ;  and  the  members  of  said  commission  are, 
and  each  of  them  is.  hereby  authorized  to  administer  oaths;  and  that  all  the 
provisions  of  article  eight,  of  chapter  two,  title  one,  part  three  of  the  Political  Code 
of  this  State,  relative  to  the  "attendance  and  examination  of  witnesses  before  the 
legislature  and  committees  thereof,"  shall  apply  to  the  commission;  and  that  the 
eergeant-at-arms  of  either  the  Senate  or  the  Assembly  is  hereby  authorized  and 
directed  to  serve  and  all  subpoenas  and  orders  or  other  process  that  may  l>e  issued  by 
the  chairman  <>t"  said  commission,  when  directed  to  do  so  by  the  said  chairman. 

Sec.  •">.  The  members  of  said  commission,  other  than  the  chairman  and  the 
member  appointed  by  the  Governor,  shall  be  paid  the  sum  of  ten  dollars  ($10.)  per 
diem  and  their  necessary  expenses,  while  actually  engaged  in   the  performance  of 

their  duties   as   prescribed   in   this   act 

Sec.  6.  There  is  hereby  appropriated  out  of  the  general  fund,  not  otherwise 
appropriated,  the  sum  of  ten  thousand  dollars,  or  s»  much  thereof  as  may  be  neces- 
sary, for  the  purposes  of  this  act. 

Sec.   7.     This  act  shall   take  effect  immediately. 


4  REPORT  OF   COMMISSION    ON    REVENUE    \.\l>  TAXATION. 

Appointment  and  organization  of  the  Commission. 

In  accordance  with  the  provisions  of  this  act,  the  Senate  and  the 
Assembly  before  the  close  of  the  thirty-sixth  session  of  the  Legislature, 
appointed  a  joint  committee  composed  of  J.  B.  Cm-tin  and  M.  L.  Ward, 
Senators,  and  II.  8.  G.  McCartney  and  E.  F.  Treadwell,  Assemblymen, 
"to  investigate  the  Bystem  of  revenue  and  taxation  in  force  in  this 
-  te  and  to  recommend  a  plan  for  the  revision  and  reform  thereof." 
On  May  26,  1905,  the  Governor  appointed  Carl  C.  Plehn,  as  Expert  on 
Taxation  and  Public  Finance,  and  to  sit  as  a  member  of  the  Com- 
mission upon  the  revision  and  reform  of  the  system  of  revenue  and 
taxation. 

The  Commission  so  constituted  organized  at  a  meeting  held  in  the 
office  of  the  Governor  May  27,  1905.  The  Commission  adopted  ae  its 
abbreviated  name  "The  Commission  on  Revenue  and  Taxation."  .Mr. 
Plehn  was  elected  secretary. 

Meeting's. 

The  Commission  has  held  ten  meetings,  each  time  at  the  call  of  the 
Governor,  as  follows:  At  Sacramento,  in  the  office  of  the  Governor, 
May  27.  1905;  October  9,  1905;  November  12  and  13,  1905;  December 
10  and  11,  11*05;  at  Santa  Rosa,  in  conjunction  with  the  Convention  of 
the  Assessors,  December  12,  1905;  at  Sacramento  in  the  office  of  the 
Governor,  January  28,  29,  and  30,  1906;  March  4,  5,  and  6,  1906:  at 
Berkeley,  in  the  office  of  the  Secretary  of  the  Commission  and  in  the 
Faculty  Room,  California  Hall,  University,  July  1  and  2,  1906;  Sep- 
tember  9  and  10,  1906,  and  October  21,  22.  and  23,  1906.  Minutes  of 
these  meetings  are  on  file  in  the  office  of  the  Secretary  of  the  Com- 
mission. 

The  extent  of  the  Commission's  work. 

The  Com  minion  has  gathered  data  from  every  available  source  as 
to  the  operation  of  the  present  tax  laws,  and  has  determined,  as  nearly 
as  may  be,  the  burden  imposed  on  each  class  of  property. 

It  lias  carefully  examined  the  financial  reports  and  revenue  laws  of 
every  State  in  the  Union  for  suggestions  as  to  remedies,  and  has 
corresponded  with  the  tax  commissions  and  other  officers  and  with  well- 
posted   individuals  in  other  states. 

[1  baa  ascertained  the  taxes  now  paid  and  the  data  necessary  to 
determine  what  taxes  ought  to  be  paid  by  each  class  of  corporations 
affected  by  its  plan.  It  has  given  a  hearing  to  the  different  classes  of 
corporations  affected,  and  patiently  followed  out  and  verified,  or 
refuted,  the  arguments  presented.  At  every  step  it  has  proceeded 
with. ml  prejudice  and  without  prejudging  the  results.    The  correspond- 

,.,,, f   the   Commission    in   securing   information    has   involved   over 

6,000  Letters. 


REPORT   OF    COMMISSION   ON   REVENUE    AND   TAXATION.  O 

The  Commission  has  had  the  constant  advice,  assistance,  and 
co-operation  o£  the  State  Controller,  the  State  Board  of  Equalization, 
of  every  Assessor  in  the  State  with  but  one  or  two  exceptions,  of  Tax 
Collectors,  and  of  city  officials.  As  these  officers  are  in  daily  contact 
with  the  administration  of  the  revenue  laws  and  know  their  provisions 
ami  effects  thoroughly,  their  assistance  has  been  of  the  utmost  impor- 
tance. They  arc  practically  unanimous  as  to  the  faults  of  our  present 
system  and  the  adequacy  of  the  remedies  proposed.  The  State  Board 
of  Equalization,  especially,  gives  the  Commission's  plan  its  enthusiastic 
support.  The  Assessors,  in  annual  convention,  have  twice  endorsed  the 
plan.  The  State  Grange,  after  a  full  investigation  by  an  able  special 
coinmittee,  also  endorsed  it. 

The  preliminary  report. 

In  August,  1906,  the  Commission  published  a  Preliminary  Report  of 
71  pages,  which  was  submitted  to  the  members  of  the  Legislature,  sent 
to  the  newspapers,  and  to  all  persons  interested  in  the  work  of  the 
Commission. 

Why  a  preliminary  report  was  published. 

This  Preliminary  Report  was  published  in  response  to  numerous 
requests  for  definite  information  as  to  what  recommendations  the  Com- 
mission had  under  consideration.  In  it  criticism  was  invited.  It  was 
tentative  and  the  recommendations  therein  were  declared  subject  to 
modification  on  receipt  of  better  information. 

Results  of  the  publication  of  the  preliminary  report. 

The  publication  of  the  Preliminary  Report  proved  to  be  a  wise 
measure.  It  called  forth,  especially  from  the  corporate  interests  affected, 
a  great  deal  of  criticism,  and  was  the  means  of  eliciting  a  large  amount 
of  additional  information  of  the  most  valuable  sort.  As  a  result  of  the 
consideration  of  this  new  information  a  number  of  the  recommendations 
suggested  tentatively  in  the  Preliminary  Report  have  been  substa nil '.all y 
modified. 

Nature  of  the  information  furnished  by  corporations. 

With  the  exception  of  the  Pullman  Company  and  a  few  of  the  foreign 
car  companies,  every  one  of  the  corporate  interests  affected  by  the 
proposed  changes  has  furnished,  fully  and  freely,  all  the  information 
required  by  the  Commission,  even  to  the  extent  of  throwing  open 
the  books  and  records.  As  the  publication  of  the  details  concerning 
the  business  of  any  individual  corporation  might  place  in  the  hands  of 
its  competitors  information  which  could  be  used  to  its  detriment,  the 
Commission,  in  accordance  with  the  usual  practice  of  similar  bodies, 


6  REPORT   OF   COMMISSION   OX   REVENUE   AND   TAXATION. 

baa  treated  the  reports  as  strictly  confidential.  Only  general  averages 
such  as  will  Dot  reveal  the  private  affairs  and  business  of  any  indi- 
vidual or  corporation  are  given. 

Hearing's. 

Every  corporate  interest  affected  was  offered  a  full  and  complete 
hearing,  and  this  offer  was  accepted  very  fully.  Representatives  of 
associated  interests  such  as  the  Street  Car  Companies'  Association,  the 
Association  of  Light,  Heat  and  Power  Companies,  the  Bankers'  Associa- 
tion, and  many  representatives  of  individual  corporations  have  either 
appeared  before  the  Commission  at  its  regular  sessions,  or  have  gone 
over  the  matters  involved  with  the  Chairman,  the  Secretary,  or  wilh 
individual  members  of  the  Commission  and  given  all  requisite  informa- 
tion. The  sole  exception  is  the  Pullman  Company,  which  declared 
itself  unable  to  present  any  data,  but  presented  many  arguments. 
These  hearings  in  general  have  resulted  in  a  clearer  understanding  as 
to  the  probable  effect  of  the  Commission's  proposed  changes. 

In  general,  the  discussions  at  these  hearings  had  relation  to  the 
rates  proposed.  In  only  one  instance,  namely,  by  the  Pullman  Com- 
pany, has  the  method  of  taxation  proposed  or  the  general  plan  of  the 
Commission  been  attacked  in  principle. 

The  recommendations  are  not  untried  novelties. 

At  the  very  beginning  of  its  work  the  Commission  decided  not  to 
search  for  or  to  try  to  invent  untried  or  novel  methods  of  taxation.  It 
has  selected  in  all  of  its  recommendations  methods  that  have  been 
fully  tested  in  other  states  of  the  United  States.  The  methods  of 
foreign  countries  have  been  studied,  but  the  recommendations  are  all 
d  upon  good  American  precedents. 

The  remedies  suggested  for  the  existing  evils  may  be  characterized 
as  strictly  in  line  with  the  natural  evolution  of  the  American  system 
of  state  taxation,  as  that  evolution  has  proceeded  in  other  advanced 
states  of  the  Union.  Every  year  sees  some  state  or  states  move  in  the 
direction  of  the  separation  of  state  from  local  taxation  as  to  sources  of 
revenue  and  the  abandonment  of  the  old  general  property  tax  as  applied 
to  public-service  corporations  whose  business  is  general  rather  than 
local  in  character.  It  is  time  that  California  "got  in  line"  with  the 
more  advanced  of  her  sister  states. 


PART  I. 


ENUMERATION  OF  CONCLUSIONS  AND 
RECOMMENDATIONS. 


. 


SECTION  I. 


THE   FINDINGS. 


The  more  important  findings  of  the  Commission  are  as  follows : 

A.  Faults  in  the  old  system. 

1.  In  general  the  present  system  of  taxation  does  not  meet  the 
demands  made  upon  it.  It  is  antiquated,  having  been  adopted  fifty 
years  ago,  and  has  not  been  revised  to  keep  pace  with  modern  conditions. 

2.  It  is  full  of  inequalities,  which  impose  a  handicap  on  the  growth  of 
the  State,  a  handicap  which  only  the  vigor  and  inexhaustible  energy  of 
our  people  can  carry. 

These  inequalities  twist  and  distort  our  industries  and  prohibit  a 
symmetrical  development  of  our  resources.  They  place  an  undue 
burden  upon  agriculture  especially;  the  foundation  of  our  wealth,  the 
one  industry  which  most  fully  exploits  the  great  natural  resources  of 
the  State. 

3.  The  taxes  paid  by  farmers  in  California  are  equivalent  to  an 
income  tax  of  10%.  This  is  in  contrast  to  many  other  industries;  for 
example,  the  taxes  paid  by  manufacturers,  which  amount  only  to  2%  on 
income.  The  persons  engaged  in  agriculture,  with  an  average  yearly 
income  of  about  $500,  pay  $50  per  capita  per  annum  in  taxes.  The 
persons  engaged  in  manufactures,  with  an  average  annual  income,  of 
$870,  pay  $17.50  per  capita  per  annum. 

4.  Our  chief  tax,  called  a  general  property  tax,  has  in  fact  become  a 
real  estate  tax.  Only  from  15%  to  18%  of  the  entire  taxes  are  levied 
on  personal  property. 

5.  The  amount  of  personal  property  on  the  tax  rolls  to-day  is  hardly 
larger  than  it  was  in  1872. 

6.  Money  and  credits  escape  taxation  almost  entirely.  Our  laws  in 
regard  to  the  taxation  of  this  class  of  property  are  full  of  absurdities 
and  utterly  nnenforeible.  It  is  unwise  to  retain  these  provisions  on 
the  statute  books. 

7.  National  banks  pay  no  taxes  at  all,  except  on  real  estate,  of  which 
they  are  not  permitted  to  hold  much,  by  the  provisions  of  the  Federal 
laws. 


In  REPORT  OP   COMMISSION   ON    REVENUE   AND   TAXATION. 

8.  State  commercial  banks,  subject  to  our  tax  Laws,  are  badly  handi- 
capped  by  tbe  competition  of  the  untaxed  national  banks.  Many  of 
them  have  become  national  banks  partly  for  the  reason  that  they  would 
not  then  be  subject  to  taxation. 

9.  State  commercial  banks,  to  live  at  all,  in  face  of  this  competition, 
are  forced  to  evade  taxation  whenever  possible  and  are  hampered  in 
their  investments  by  unwise  provisions  of  our  tax  laws. 

10.  Savings  banks,  which  harbor  the  savings  of  the  workers,  and 
which  are,  in  many  states,  granted  special  rebates  in  taxation  on  that 
account,  are  the  only  class  of  banks  which  pay  their  full  quota  of  taxes. 

11.  "Equalization,"  so  called,  does  not  equalize,  and  in  the  nature  of 
things,  can  not  equalize.     After  the  officers  have  exhausted  their  best 

efforts  in  this  direction  there  are  inequalities— glaring  ones — between 
real  estate  and  personal  property;  between  different  classes  of  personal 
property:  between  county  and  county;  between  city  and  city,  between 
city  and  country;  between  man  and  man.  All  of  whieh  are  rarely 
removed  and  often  intensified  by  so-called  equalization. 

12.  The  original  inequalities  in  the  assessment  are  intensified  by  the 
constant  piling  up  of  tax  on  tax  on  the  same  base.  If  a  city  has  a  rate 
of  $1.00,  which  may  be  "reasonable"  enough,  there  often  comes  on  top 
of  that  a  county  tax  of  another  $1.00,  a  few  special  school  taxes,  or  a 
sewer  tax,  or  a  tax  for  bonds,  or  a  levee  tax,  or  a  drainage  tax,  etc.,  etc., 
nntil  the  effects  of  any  inequalities  in  the  original  assessment  have  been 
multiplied  anywhere  from  two  to  five  fold.  Aggregate  tax  rates  falling 
on  city  property  range  from  $1.65  per  $100  to  $5.00  per  $100  of 
assessed  valuation. 

13.  Counties  with  relatively  undeveloped  resources  often  have  very 
high  tax  rates  on  relatively  high  valuations,  while  some  of  the  richest 
counties  enjoy  a  low  tax  rate  on  low  valuations. 

14.  The  present  system  takes  the  revenue  derivable  by  taxation  from 
large  general  organizations,  like  the  railroads,  which  revenue  belongs 
by  right  to  the  people  of  the  State  at  large,  and  distributes  it  most 
inequitably  among  the  local  divisions  of  the  State  which  have  no 
proper  claim  to  it  whatsoever. 

15.  Under  the  present  system  it  is  impossible  to  adjust  the  burden 
of  taxation  equitably  between  different  classes  of  corporations. 

16.  Our  present  system  is  a  "school  for  perjury,"  puts  a  penalty  on 
honesty   and   pays  high  premiums  for  dishonesty. 

Our  present  system  is  so  embodied  in  our  Constitution  that  it  can  not 
be  bettered  without  a  constitutional  amendment. 


REPORT   OF    COMMISSION   ON   REVENUE   AND   TAXATION.  11 

B.  Remedies. 

The  Commission  recommends: 

1.  Separation  of  State  from  local  taxation  as  to  sources  of  revenue. 
This  is  the  first  step  in  reform. 

Complete  separation  implies  that  the  State  shall  collect  its  revenues 
from  sources  other  than  a  direct  levy  on  real  and  personal  property 
of  individuals,  leaving  to  the  counties  and  cities  the  exclusive  right  to 
tax  such  property  for  local  purposes. 

This  will  take  the  burden  of  direct  State  taxation  off  real  estate,  and 
save  the  owners  of  real  estate  about  $4,000,000  annually. 

It  establishes,  at  once,  home  rule  in  matters  of  local  taxation. 

It  abolishes,  at  once,  any  necessity  for  equalization  between  counties, 
and  cures  the  evils  State  equalization  fails  to  reach. 

The  property  belonging  to  the  subjects  selected  for  State  taxation 
shall,  so  far  as  it  is  reached  by  the  State,  whether  through  its  earnings 
or  directly,  be  exempt  from  local  taxation. 

Separation,  while  not  a  remedy  in  and  of  itself,  except  for  the  evils 
arising  from  the  breakdown  of  so-called  equalization,  opens  the  way 
for  a  proper  classification  of  the  subjects  of  State  taxation,  and  makes 
it  possible  to  tax  each  class  with  a  greater  approximation  to  equality 
than  is  possible  without  it. 

The  exact  boundary  line,  the  line  of  "separation,"  between  the 
State 's  power  of  taxation  and  the  powers  to  be  exercised  by  the  counties 
and  their  subdivisions,  will  be  denned  in  connection  with  each  class  of 
subjects  selected  for  State  taxation. 

(See  36,  "New  Sources,"  below.) 

2.  That  an  absolute  divorce  between  State  and  local  taxation  be  the 
ultimate  aim,  and  that  as  nearly  complete  separation  as  possible  be 
attained  at  the  very  outset. 

3.  That  the  State  derive  its  revenues  from  the  following  sources : 

a.  Old  sources  continued. 

(1)  The  Poll  Tax. 

(2)  The  Inheritance  Tax. 

(3)  The   Tax   on   Insurance  Premiums.      (Modified  to   remove 
existing  discriminations.) 

(4)  The  annual   franchise  tax  on  corporations    (modified  and 
made  proportional). 

(5)  All  fees  now  collected. 

(6)  All  collections  by  State  institutions   (some  of  which  may 
be  increased). 

(7)  All  earnings  of  State  Property  and  Investments. 

(8)  The  revenue  from  sale  of  State  lands. 

N.  B.— The  right  to  levy  on  general  property  should  not  be  sur- 
rendered, but  should  be  resorted  to  only  to  make  good  a  deficit. 


]-  REPORT  OF   COMMISSION   ON    REVEN1  l.   AND  TAXATION. 

b.   New  sources. 

(1)  A  gross  earnings  lax  on  railroads;  street  railroads;  express 
companiea;  car  i panies;  Light,  heat,  ami  power  companies;  tele- 
graph and  telephone  companies,  at  rates  fixed  Eor  a  period  of  six 

years  by  const itutional  enactment,  after  which  time  they  may  be 
amended  by  the  Legislature,  but  not  more  frequently  than  once 

every  six  years. 

This  tax  is  to  be  in  lieu  of  all  other  taxes  except  taxes  on  property 
nut  necessarily  used  in  the  operations  conducted  by  the  companies. 
The  counties  and  cities  would,  therefore,  be  forbidden  to  tax  this 
das>  of  corporations. 

(2)  A  tax  on  the  shares  of  capital  stock  of  all  banks  at  1%  of 
the  book  value  of  the  stock.  The  book  value  is  the  sum  of  the  paid 
up  capital  and  the  accumulated  surplus  and  undivided  profits. 

This  tax.  like  the  gross  earnings  tax,  is  to  be  in  lieu  of  all  other 
taxes  on  the  banks,  except  taxes  on  real  estate,  the  assessed  value 
of  which  is,  however,  to  be  deducted  from  the  capital  before  the 
1%  rate  is  applied.  Cities  and  counties  would  be  deprived  of  the 
right  to  tax  banks  except  on  their  real  estate  and  mortgages. 

(3)  A  tax  at  the  rate  of  1%  on  the  assessed  value  of  all  corporate 
franchises  of  every  sort,  not  covered  by  the  above  mentioned  taxes, 
such  franchises  to  be  valued  by  the  State  Board  of  Equalization. 
This  tax.  also,  would  be  in  lieu  of  local  taxes  on  such  franchises. 

The  solution  of  the  vexed  question  of  the  taxation  of  franchises. 

One  of  the  advantages  of  the  proposed  system  is  that  it  solves  com- 
pletely the  much  vexed  question  of  the  taxation  of  franchises. 

The  recommendations  made  in  the  Preliminary  Report  in  regard  to 
the  taxation  of  franchises  are  not  materially  modified  in  the  final  report. 
The  latter,  however,  brings  them  together  in  one  chapter  for  discussion. 
Si  e  Chapter  VIII,  in  Part  III.) 

If  the  recommendations4  are  adopted,  franchises,  of  every  sort,  belong- 
ing to  railroads  and  all  other  public-service  corporations,  for  the  taxa- 
tion of  which  a  gross  earnings  tax  is  recommended,  will  be  covered  by 
that  tax.  which  is  to  be  in  lieu  of  all  other  taxes  and  licenses,  state, 
county,  and  local,  on  operative  property.  This,  of  course,  will  not  in  any 
way  interfere  with  any  contract  obligations  of  street  railroads  and  the 
like,  to  pay,  under  the  Broughton  Act  or  under  provisions  of  city 
charters,  any  percentage  of  gross  earnings  or  any  other  payment, 
provided  for  in  the  contract  made  with  the  cities  at  the  time  of  the 
granting  of  a  special  franchise.  Such  a  payment,  sometimes  mis- 
called a  "tax,"  is  not  a  tax,  but  a  quid  pro  quo  for  the  franchise,  a  part 
of  its  purchase  price. 

All  the  franchises  of   banks  and  insurance  companies  will  also  be 


REPORT  OF   COMMISSION'   OX   REVENUE   AND   TAXATION.  13 

covered  by  the  State  taxes  provided  for  these  classes  of  corporations, 
and  no  further  taxes  or  licenses  are  to  be  levied  thereon. 

The  mere  franchise  to  be  a  corporation  will  be  covered  for  all  cor- 
porations other  than  the  above  by  the  existing  annual  fee  now  $20, 
which  the  Commission  recommends  shall  be  made  proportional  at  one 
twentieth  of  1%. 

This,  the  Commission  thinks,  covers  practically  all  franchises  of 
every  sort:  (1)  to  be,  (2)  to  do,  in  general  and  (3)  to  do  special  things; 
except  the  special  franchises  of  water  companies,  the  latter  not  being 
included  among  the  subjects  of  State  taxation,  and  possibly  some  fur- 
ther exceptions  which  we  do  not  now  foresee.  But  to  make  sure  that 
this  vexed  question  of  franchise  taxation  is  taken  entirely  out  of  the 
hands  of  the  assessors  who  are  not  in  a  position  to  handle  it  satis- 
factorily j  there  has  been  introduced  into  the  constitutional  amendment 
a  provision  that,  ''all  other  franchises,"  shall  be  assessed  by  the  State 
Board  of  Equalization  annually  and  pay  to  the  State  a  tax  of  1%  on 
that  valuation. 


ESTIMATE  OF  STATE  REVENUES  UNDER  THE  COMMISSION'S   PLAN. 

A.  Old  revenues  retained  or  only  slightly  changed. 

1.  The  poll  tax.  -- $500,000 

2.  The  inheritance  tax 300,000 

3.  Insurance  taxes  and  fees 300,000 

4.  Official  fees  sundry  offices 250,000 

5.  Collections  by  State  boards  and  institutions 225,000 

6.  Earnings  of  State  property  and  investments 1,000,000 

°  $2,575,000 

B.  New  sources  recommended. 

Taxes  on : 

1.  Railroads,  including  street  railroads. $3,800,000* 

2.  Express  companies 120,000 

3.  Car  companies --- - -  r5,000* 

4.  Telegraph  and  telephone  companies --. 210,000 

5.  Light,  heat  and  power  companies --  600,000* 

6.  Franchises - 500,000 

T.Banks - ---    1.500,000 

6,805,000 

Total -. - -'--    $9,380,000 

If  the  higher  of  the  two  rates  suggested  in  several  rases  for  the  gross  earnings 

tax  be  adopted,  the  aggregate  would  be $10,500,000 

If  a  liquor  tax,  aa  suggested  without  recommendation,  were  adopted,  it  would 

add  $750,000,  making /- $11.2."xi.(mhi 

Or  with  the  lower  of  the  two  rates  suggested  for  gross  earnings  taxes $10,130,000 

The  average  State  income  under  the  existing  system  is 

It  Is  practically  certain  that  the  system  recommended  by  the  Com- 
mission can  be  made  to  yield  all  the  revenue  needed  by  the  State. 

*At  4%  on  gross  earnings,  the  lower  of  the  two  rates  suggested. 


14  REPORT  OF   COMMISSION  ON  REVENUE   AND   TAXATION. 


SECTION  II. 

THE  CONSTITUTIONAL  AMENDMENT. 


The  Constitution  prohibits  separation  expressly,  by  declaring  that, 
"No  county,  city,  town,  or  other  public  or  municipal  corporation,  nor 
the  inhabitants  thereof,  nor  the  property  therein,  shall  be  released  or 
discharged  from  its  or  their  proportionate  share  of  taxes  to  be  levied  for 
State  purposes,  nor  shall  commutation  for  such  taxes  be  authorized  in 
any  form  whatsoever."     (Sec.  10,  Art.  XL) 

Other  passages  can  be  interpreted  so  as  to  make  the  same  restriction. 

The  Constitution  has,  however,  a  most  liberal  clause  permitting  an 
income  tax.  "Income  taxes  may  be  assessed  to  and  collected  from 
persons,  corporations,  joint-stock  associations,  or  companies  resident  or 
doing  business  in  this  State,  or  any  one  or  more  of  them,  in  such  cases 
and  amounts,  and  in  such  manner,  as  shall  be  prescribed  by  law."  (Sec. 
11,  Art.  XIII.) 

Under  this  provision  it  is  clear  that  the  State  may  levy  an  Income  tax, 
not  only  upon  its  citizens  in  general,  but  upon  any  class  of  corporations, 
or,  possibly,  even  upon  any  one  corporation.  This  is  altogether  the 
broadest  provision  of  the  Constitution  relating  to  taxation.  It  places 
almost  unlimited  power  in  the  hands  of  the  Legislature. 

It  would  be  perfectly  possible  to  provide  a  system  of  State  revenues 
under  this  grant  of  power. 

The  Commission  believes,  however,  that  it  would  not  be  wise  to  take 
advantage  of  this  section. 

A  ffeneral  income  tax  is  un-American.  Our  people  have  so  much 
respect  for  labor  that  what  is  won  by  honest  toil  is  regarded  as  sacred 
i  nd  not  to  be  reduced  by  direci  taxation.  Sixteen  states  have  tried 
the  income  tax.  In  every  case  it  was  a  failure,  being  evaded,  disliked, 
laxly  enforced,  and  yielding  small  returns.  Virginia,  the  only  State 
which  made  any  success  with  it  at  all,  and  that  a  small  one.  has  recently, 
by  constitutional  convention,  adopted  the  general  plan  proposed  by  this 
Commission. 

A  special  income  tax  on  selected  classes  of  corporations,  in  addition 
to  the  taxes  now  paid,  is  a  possibility  under  11m  Constitution,  and  a 
possibility  which  this  Commission  recommends  shall  stand.  But  the 
Commission  does  not  believe  that  a  resort  to  such  drastic  methods  at 
present  is  either  necessary  or  wise.  The  necessary  reforms  can  be 
accomplished  in  other  ways. 


REPORT   OF   COMMISSION   ON   REVENUE  AND   TAXATION.  15 

The  Commission  presents  herewith  a  constitutional  amendment 
which,  it  is  thought,  will  make  it  possible  to  accomplish  the  general 
results  aimed  at. 

This  amendment  proposes : 

1.  The  repeal  of  Section  10  of  Article  XI.  This  section,  quoted  above, 
prohibits  separation. 

This  section  serves  no  good  purpose  and  never  has  served  one,  having 
been  copied  from  a  provision  of  the  Missouri  Constitution,  which  was 
widely  copied  in  other  states.  It  has  no  bearing  on  other  provisions 
of  our  Constitution. 

2.  The  entire  revision  of  Article  XIII,  which  is  the  chapter  or  article 
bearing  on  revenue  and  taxation. 


*» 


The  revision  is  to  accomplish  the  following  results: 

(1)  To  eliminate  or  modify  those  provisions  which  might  be  held  to 
prohibit  separation  of  State  from  loeal  taxation. 

(2)  To  enumerate  the  subjects  of  taxation  to  be  set  aside  for  the 
exclusive  use  of  the  State,  and  to  specify  the  method  of  their  taxation. 

The  gist  of  these  changes  has  been  tersely  stated  above. 

(3)  To  bring  all  the  exemptions  now  scattered  through  several  sec- 
tions into  one. 

N.  B.  — Sections  unchanged  will  retain  their  old  numbers,  to  facilitate 
reference  to  court  decisions  and  the  like  where  they  have  been  discussed. 

PROPOSED  AMENDMENT. 

A  resolution  to  propose  to  the  people  of  the  State  of  California  an  amend- 
ment to  the  Constitution  of  the  State  of  California  providing  for  the 
separation  of  State  from  local  taxation,  providing  for  the  taxation  of 
public-service  and  other  corporations  for  the  benefit  of  the  State,  and  to 
that  end  amending  Article  thirteen  and  repealing  Section  ten  if  Article 
eleven  thereof,  all  relating  to  revenue  mid  luxation. 

Whereas,  It  is  deemed  desirable  to  ultimately  separate  the  sources  of 
revenue  for  State  purposes  from  the  sources  of  revenue  for  county  and 
municipal  purposes;  now,  therefore, 

The  Legislature  of  the  State  of  California,  at  its  regular  session,  com- 
mencing the  seventh  day  of  January,  nineteen  hundred  and  ^'ven, 
two  thirds  of  all  the  members  elected  to  each  of  the  two  houses  of  said 
Legislature  voting  in  favor  thereof,  hereby  proposes  to  the  qualified 
electors  of  the  State  of  California  the  following  amendment  to  tin- 
Constitution  of  the  State  of  California: 

First.     Article  thirteen  is  herein' amended  bo  as  to  read  as  follows: 

Section  1.  All  property  in  the  State  except  as  otherwise  in  this 
Constitution  prorided,  not  exempt  under  the  laws  of  the  United  States, 


16  REPORT  OF   COMMISSION   ON    REVENUE   A\'l>   TAXATION. 

shall  be  taxed  in  proportion  to  its  value,  to  be  ascertained  as  provided 
by  law,  or  as  hereinafter  provided.  The  word  "property,"  as  used  in 
this  article  and  Bection,  is  hereby  declared  to  include  moneys,  credits, 
bonds,  -tock-.  dues,  franchises,  and  all  other  matters  and  things,  real, 
personal,  and  mixed,  capable  of  private  ownership.  The  Legislature 
may  provide,  except  in  case  of  credits  secured  by  mortgage  or  trust 
deed,  for  a  deduction  from  credits  of  debts  due  to  bona  tide  residents  of 
this  State. 

The  following  classes  of  property  shall  be  exempt  from  taxation: 
(a  i    Property  used  for  free  public  libraries  and  free  museums,  grow- 
in-  crops,  property  used  exclusively  for  public  schools,  and  such  as  may 
belong  to   the  United  States,  this  State,  or  to  any  county  or  municipal 
corporation  within  this  State. 

(b)  All  buildings,  and  so  much  of  the  real  property  on  which  they 
are  situated  as  may  be  required  for  the  convenient  use  and  occupation 
of  such  buildings,  when  the  same  are  used  solely  and  exclusively  for 
religious  worship;  but  no  building  so  used  which  may  be  rented  for 
religious  purposes  and  rent  received  by  the  owner  therefor,  shall  be 
exempt  from  taxation. 

(c)  All  bonds  hereafter  issued  by  the  State  of  California,  or  by  any 
county,  city  and  county,  municipal  corporation,  or  district  (including 
school,  reclamation,  and  irrigation  districts)  within  said  State. 

(d)  Fruit  and  nut-bearing  trees  under  the  age  of  four  years  from  the 
time  of  planting  in  orchard  form,  and  grapevines  under  the  age  of 
three  years  from  the  time  of  planting  in  vineyard  form. 

Nothing  herein  shall  be  construed  as  amending  or  in  any  way  alter- 
ing sections  nine,  ten,  eleven,  and  twelve  of  Article  nine. 

Sec  2.  Lands,  and  the  improvements  thereon,  shall  be  separately 
assessed.  Cultivated  and  uncultivated  land,  of  the  Bame  quality,  and 
similarly  situated,  shall  be  assessed  at  the  same  value. 

Sec.  •'>.  Every  tract  of  land  containing  more  than  six  hundred  and 
forty  acres,  and  which  has  been  sectionized  by  the  United  States  Gov- 
ernment, shall  be  assessed,  for  the  purposes  of  taxation,  by  sections  or 
fractions  of  sections.  The  Legislature  shall  provide  by  law  for  the 
assessment,  in  small  tracts,  of  all  lands  not  sectionized  by  the  United 
State-  Government. 

Si;.  .  I.  A  mortgage,  deed  of  trust,  contract,  or  other  obligation  by 
which  a  debl  IS  secured,  shall,  for  the  purposes  of  assessment  and  taxa- 
tion, be  deemed  and  treated  as  an  interest  in  the  property  affected 
thereby.  Except  as  to  railroad  and  other  quasi-public  corporations, in 
case  of  debl  so  Becured,  the  value  of  the  property  affected  by  such 
mortgage,  deed  of  trust,  contract,  or  obligation,  less  the  value  of  such 
security,  shall  be  assessed  and  taxed  to  the  owner  of  the  property,  and 
the  value  of  such  security  shall   he  asx^edjand   taxed   to  the  owner 


REPORT   OF   COMMISSION   ON   REVENUE    AND   TAXATION.  17 

thereof,  in  the  county,  city,  or  district  in  which  the  property  affected 
thereby  is  situate.  The  taxes  so  levied  shall  be  a  lien  upon  the  prop- 
erty and  security,  and  may  be  paid  by  either  party  to  such  security;  if 
paid  by  the  owner  of  the  security,  the  tax  so  levied  upon  the  property 
affected  thereby  shall  become  a  part  of  the  debt  so  secured;  if  the 
owner  of  the  property  shall  pay  the  tax  so^  levied  on  such  security,  it 
shall  constitute  a  payment  thereon,  and  to  the  extent  of  such  payment, 
a  full  discharge  thereof;  provided,  that  if  any  such  security  or  indebted- 
ness shall  be  paid  by  any  such  debtor  or  debtors,  after  assessment  and 
before  the  tax  levy,  the  amount  of  such  levy  may  likewise  be  retained 
by  such  debtor  or  debtors,  and  shall  be  computed  according  to  the  tax 
levy  for  the  preceding  year. 

Sec.  5.     (Repealed.) 

Sec.  6.  The  power  of  taxation  shall  never  be  surrendered  or  sus- 
pended by  any  grant  or  contract  to  which  the  State  shall  be  a  party. 

Sec.  7.  The  Legislature  shall  have  the  power  to  provide  by  law  for 
the  payment  of  all  taxes  on  real  property  by  installments. 

Sec.  8.  The  Legislature  shall  by  law  require  each  taxpayer  in  this 
State  to  make  and  deliver  to  the  county  assessor,  annually,  a  state- 
ment, under  oath,  setting  forth  specifically  all  the  real  and  personal 
property  owned  by  such  taxpayer,  or  in  his  possession,  or  under  his 
control,  at  twelve  o'clock  meridian  on  the  first  Monday  of  March. 

Sec.  9.  A  State  Board  of  Equalization,  consisting  of  four  members, 
shall  be  elected  by  the  qualified  electors  of  the  State  at  the  general 
election  to  be  held  in  the  year  one  thousand  eight  hundred  and  eighty- 
six,  and  at  each  gubernatorial  election  thereafter,  whose  term  of  office 
shall  be  for  four  years;  whose  duty  it  shall  be  to  equalize  the  valuation 
of  the  taxable  property  in  the  several  counties  of  the  State  for  the  pur- 
poses of  taxation  and  it  shall  perform  such  other  duties  in  relation  to 
taxation  as  this  Constitution  or  the  Legislature  may  prescribe.  The 
Controller  of  State  shall  be  ex  officio  a  member  of  the  board.  The 
boards  of  supervisors  of  the  several  counties  of  the  State  shall  constitute 
boards  of  equalization  for  their  respective  counties,  whose  duty  it  shall 
be  to  equalize  the  valuation  of  the  taxable  property  in  the  county  for 
the  purposes  of  taxation;  provided,  such  State  and  County  Boards  of 
Equalization  are  hereby  authorized  and  empowered,  under  such  rules 
of  notice  as  the  county  boards  may  prescribe  as  to  county  assessments, 
and  under  such  rules  of  notice  as  the  State  board  may  prescribe  as  to 
the  action  of  the  State  board,  to  increase  or  lower  the  entire  assessment 
roll,  or  any  assessment  contained  therein,  so  as  to  equalize  the  assessment 
of  the  property  contained  in  said  assessment  roll,  and  make  the  assess- 
ment conform  to  the  true  value  in  money  of  the  property  contained  in 
said  roll;  provided,  that  no  board  of  equalization  shall  raise  any  mort- 
gage, deed  of  trust,  contract  or  other  obligation  by  which  a  debt  is 
2— RT 


18  REPORT  OF   COMMISSION   ON    REVENUE   AM>  TAXATION. 

secured,  money,  or  solvent  credit.  above  its  face  value.  The  present 
State  Board  of  Equalization  shall  continue  iii  office  until  their  suc- 
<■<  3BOT8,  .1-  herein  provided  for.  shall  he  elected  and  shall  qualify. 

-  .  10.  All  property,  except  as  otherwise  in  this  Constitution  pro- 
vided, shall  be  assessed  in  the  county,  city,  city  and  county,  town. 
township,  or  district  in  which  it  is  situated,  in  the  manner  prescribed 
by  law. 

Sec.  11.  Income  taxes  may  be  assessed  to  and  collected  from  per- 
son.-, corporations,  joint-stock  associations,  or  companies  resident  or 
doing  business  in  this  State,  or  any  one  or  more  of  them,  in  such  cases 
and  amounts,  and  in  such  manner,  as  shall  be  prescribed  by  law. 

Sec.  12.  The  Legislature  shall  provide  for  the  levy  and  collection 
of  an  annual  poll  tax,  of  not  less  than  two  dollars,  on  every  male  inhab- 
itant of  this  State  over  twenty-one  years  and  under  sixty  years  of  age, 
except  paupers,  idiots,  insane  persons,  and  Indians  not  taxed.  Said 
tax  shall  be  paid  into  the  State  school  fund. 

Sec.  13.  Taxes  levied,  assessed  and  collected  as  hereinafter  provided 
upon  railroads,  including  street  railways,  whether  operated  in  one  or 
more  counties,  sleeping  car,  dining  car,  drawing-room  car  and  palace 
car  companies,  refrigerator,  oil,  stock,  fruit,  and  other  car-loaning  or 
other  car  companies  operating  upon  railroads  in  this  State,  every  com- 
panv  doing  express  business  on  any  railroad,  steamboat,  vessel  or  stage 
line  in  this  State,  telegraph  companies,  telephone  companies,  companies 
engaged  in  the  transmission  or  sale  of  gas  or  electricity,  insurance  com- 
panies, banks,  banking  associations,  savings  and  loan  societies,  and 
trust  companies  and  taxes  upon  all  franchises  of  every  kind  and  nature, 
shall  be  entirely  and  exclusively  for  State  purposes,  and  shall  be  levied, 
a— essed,  and  collected  in  the  manner  hereinafter  provided.  The  word 
"com] -allies"  as  used  in  this  section  shall  include  persons,  partnerships, 
joint-stock  associations,  companies,  and  corporations. 

(a)  All  railroad  companies,  including  street  railways,  whether  oper- 
ated in  one  or  more  counties,  all  sleeping  car,  dining  car,  drawing-room 
car,  and  palace  car  companies,  all  refrigerator,  oil,  stock,  fruit  and 
other  car-loaning  and  other  car  companies,  operating  upon  the  rail- 
roads in  this  State,  all  express  companies,  all  telegraph  and  telephone 
companies,  all  companies  engaged  in  the  transmission  or  sale  of  gas  or 
electricity,  shall  annually  pay  to  the  State  a  tax  upon  their  franchises, 
roadway-,  roadbeds,  rails,  rolling  stock,  poles,  wires,  pipes,  canals,  con- 
duits, rights  of  way,  and  other  property  used  in  the  operation  of  their 
business  LI)  this  State,  computed  as  follows:  Said  tax  shall  he  equal  to 
the  percentages  hereinafter  fixed  upon  the  gross  receipts  from  operations 
of  such  companies  and  each  thereof  within  this  State.  When  such 
companies  are  operating  partly  within  and  partly  without  this  State, 
the  gross  receipts  within  this  State  shall  be  deemed  to  be  all  receipts  on 


REPORT   OF    COMMISSION   ON    REVENUE    AND   TAXATION.  19 

business  beginning  and  ending  within  this  State,  and  a  proportion, 
based  upon  the  proportion  of  the  mileage  within  this  State  to  the  entire 
mileage  over  which  such  business  is  done,  of  receipts  on  all  business 
passing  through,  into,  or  out  of  this  State.  Such  taxes  shall  be  in  lieu 
of  all  other  taxes  and  licenses,  state,  county,  and  municipal,  upon  the 
property  above  enumerated  of  such  companies;  provided,  that  nothing 
herein  shall  be  construed  to  release  any  such  company  from  the  pay- 
ment of  any  amount  agreed  to  be  paid  or  required  by  law  to  be  paid  for 
any  special  privilege  or  franchise  granted  by  the  municipal  authorities 
of  this  State. 

The  percentages  above  mentioned  shall  be  as  follows:  On  all  railroad 
companies,  including  street  railways,  —  per  cent';  on  all  sleeping  car, 
dining  car,  drawing-room  car,  palace  car  companies,  refrigerator,  oil, 
stock,  fruit  and  other  car-loaning  and  other  car  companies,  —  per  cent2; 
on  all  express  companies,  —  per  cent3;  on  all  telegraph  and  telephone 
companies,  •—  per  cent*;  on  all  companies  engaged  in  the  transmission 
and  sale  of  gas  or  electricity,  —  per  cent5. 

(/()  Every  insurance  company  or  association  doing  business  in  this 
State  shall  annually  pay  to  the  State  a  tax  of  two  per  cent  upon  the 
amount  of  the  gross  premiums  received  upon  its  business  done  in  this 
State,  less  return  premiums  and  reinsurance  in  companies  or  associa- 
tions authorized  to  do  business  in  this  State.  This  tax  shall  be  in  lieu 
of  all  other  taxes  and  licenses,  state,  county,  and  municipal,  upon  the 
property  of  such  companies,  except  taxes  on  real  estate;  provided,  that 
when  by  the  laws  of  any  other  state  or  country,  any  taxes,  fines,  penal- 
ties, licenses,  fees,  deposits  of  money,  or  of  securities,  or  other  obliga- 
tions, or  prohibitions,  are  imposed  on  insurance  companies  of  this  State, 
doing  business  in  such  other  state  or  country,  or  upon  their  agents  therein, 
in  excess  of  such  taxes,  fines,  penalties,  licenses,  fees,  deposits  of  securi- 
ties, or  other  obligations  or  prohibitions,  imposed  upon  insurance  com- 
panies of  such  other  state  or  country,  so  long  as  such  laws  continue  in 
force,  the  same  obligations  and  prohibitions  of  whatsoever  kind  may  be 
imposed  by  the  Legislature  upon  insurance  companies  of  such  other  state 
or  country  doing  business  in  this  State. 

(<•)  The  shares  of  the  capital  stock  of  all  banks,  banking  associations, 
savings  and  loan  societies,  and  trust  companies  organized  under  the  laws 
of  this  State,  or  of  the  United  States,  or  of  any  other  state  and  located 
in  this  State,  shall  be  assessed  and  taxed  to  the  owners  or  holders 
thereof  by  the  State  Board  of  Equalization,  in  the  manner  to  be  pre- 
Bcribed  by  law,  in  the  city  or  town  where  the   bank  is  located  and  not 

1  Rale  recommended,  nut  Less  than  4     nor  more  than  5%. 

*  Rate  recommended,  nol  Less  than  4    nor  more  than  .3%. 
3  Rate  recommended,  '■>   . 

*  Rate  recommended,  3}    . 

3  Rate  recommended.  QOl  Less  than  4     nor  more  than  ."> 


20  REPORT  OF  COMMISSION  ON    REVENl  1.    AND   TAXATION. 

elsewhere.  There  shall  be  Levied  and  assessed  upon  such  Bhares  of 
capital  stock  an  annual  tax.  payable  to  the  State,  of  one  per  centum 
upon  the  full  cash  value  thereof.  The  value  of  each  share  shall  never 
be  taken  to  be  less  than  the  amount  paid  in  thereon,  together  with  its 
pro  rata  of  the  accumulated  surplus  and  undivided  profits.  This  tax 
Bhall  be  in  lieu  of  all  other  taxes  and  licenses,  State,  county  and  munic- 
ipal, upon  such  shares  of  stock  and  upon  the  property  of  such  banks, 
banking  associations,  savings  and  loan  societies,  or  trust  companies, 
except  taxes  on  real  estate.  In  determining  the  value  of  the  capital 
Stock  of  any  bank  there  shall  be  deducted  from  the  value,  as  defined 
above,  the  value,  as  assessed  for  county  taxes,  of  any  real  estate,  other 
than  mortgage  interests  therein,  owned  by  such  bank  and  taxed  for 
count v  purposes.  The  banks,  banking  associations,  savings  and  loan 
societies,  and  trust  companies  shall  be  liable  to  the  State  for  this  tax 
and  the  same  shall  be  paid  to  the  State  by  them  on  behalf  of  the  stock- 
holders in  the  manner  and  at  the  time  prescribed  by  law,  and  they  shall 
have  a  lien  upon  the  shares  of  stock  and  upon  any  dividends  declared 
thereon  to  secure  the  amount  so  paid. 

All  moneyed  capital  belonging  to  private  banks  or  bankers  of  this 
State,  and  that  employed  in  this  State  by  any  banks  or  by  branches, 
agencies,  or  other  representatives  of  any  banks,  bankers  or  trust  com- 
panies other  than  those  provided  for  in  the  first  paragraph  of  this 
subdivision,  and  any  moneyed  capital,  reserve,  surplus,  "or  undivided 
profits  held  by  any  bank,  banking  association,  savings  and  loan  society 
or  trust  company  located  in  this  State,  which  has  no  shares  of  capital 
stock,  shall  be  assessed  and  taxed  by  the  State  Board  of  Equalization, 
in  the  manner  to  be  prescribed  by  law,  at  the  same  rate  that  is  assessed 
upon  the  shares  of  stock  of  banks,  banking  associations,  savings  and 
loan  societies  and  trust  companies  as  provided  in  the  first  paragraph 
of  tin-  subdivision. 

(d)  Every  corporation  incorporated  under  the  laws  of  this  State, 
excepting  the  corporations  mentioned  in  the  preceding  subdivisions  of 
this  section,  shall  pay  an  annual  tax  to  the  State  Upon  its  franchise  to 
be  a  corporation  equal  to  one  twentieth  of  one  per  cent  of  its  author- 
ized capital  stock,  and  every  corporation  incorporated  elsewhere  and 
doing  business  in  this  State,  other  than  the  corporations  mentioned  in 
the  preceding  subdivisions  of  this  section,  shall  pay  an  annual  tax  to 
the  State  upon  its  right  to  do  business  in  this  State  equal  to  one  twen- 
tieth of  one  per  cent  of  the  capital  employed  in  this  State. 

(«)  All  franchises,  other  than  those  expressly  provided  for  in  this 
section,  shall  be  assessed  by  the  State  Board  of  Equalization  at  their 
actual  value,  and  shall  be  taxed  at  the  rate  of  one  per  centum  thereon 
each  year,  and  the  taxes  collected  thereon  shall  be  exclusively  for  the 
benefit  of  the  State. 


REPORT   OF   COMMISSION   ON    REVENUE   AND   TAXATION.  21 

(/)  All  taxes  provided  for  in  this  section  shall  be  assessed  and  col- 
lected in  the  manner  provided  by  law,  and  the  Legislature  may  pass  all 
laws  necessary  to  carry  this  amendment  into  effect.  The  percentages 
and  amounts  fixed  in  this  section  shall  be  and  remain  in  force  for  six 
years  from  the  adoption  of  this  amendment,  and  thereafter  may  be 
changed  by  the  Legislature  at  intervals  of  not  less  than  six  years. 

Sec.  14.  No  suit,  action,  or  proceeding  shall  ever  be  maintained  in 
any  court  against  this  State,  or  against  any  officer  thereof,  to  have  any 
tax,  levied  under  the  provisions  of  this  article,  declared  invalid  or  to 
prevent  or  enjoin  the  collection  thereof  until  such  tax  has  been  actually 
paid ;  but  after  such  payment,  action  may  be  maintained  to  recover  any 
tax  illegally  collected  in  such  manner  and  within  such  time  as  may 
now  or  hereafter  be  provided  by  law. 

Sec.  15.  In  the  event  that  any  of  the  provisions  of  this  article,  pro- 
viding for  the  assessment  by  or  payment  to  the  State  of  taxes  upon  any 
class  of  corporations  or  property,  or  providing  for  new  methods  of  tax- 
ation not  in  force  prior  to  the  adoption  of  this  amendment,  shall  become 
inoperative  by  virtue  of  having  been  held  by  a  court  of  competent  juris- 
diction to  be  in  conflict  with  the  laws  of  the  United  States,  or  for  any 
other  reason  to  be  illegal  or  impossible  of  enforcement,  then  the  Legis- 
lature shall  provide  for  the  taxation  of  such  class  of  corporations  or 
property  either  for  State  purposes  only,  or  for  State  and  local  purposes, 
or  for  local  purposes  only,  at  its  discretion,  and  either  in  such  manner 
as  shall  then  be  constitutional,  legal  and  enforceable,  or  in  such  man- 
ner as  would  have  been  so  prior  to  the  adoption  of  this  amendment. 
Pending  such  action  by  the  Legislature  all  laws  and  constitutional  pro- 
visions relative  to  the  assessment  and  taxation  of  such  property,  in 
force  prior  to  the  adoption  of  this  amendment,  which  may  have  been 
repealed  or  modified  by  this  amendment,  or  in  conformity  thereto,  shall 
be  revived  and  be  deemed  to  be  in  full  force  and  effect.  Any  taxes 
that  may  be  levied  under  this  section  shall  be  retroactive  to  cover  the 
period  for  which  the  taxes  on  such  property  shall  have  been  declared 
to  have  been  illegally  levied. 

Sec.  16.  The  Legislature  shall  pass  all  laws  necessary  to  carry  out 
the  provisions  of  this  article. 

Second.  Section  ten  of  Article  eleven  of  said  Constitution  is  hereby 
repealed. 

NOTES. 
Sectioh  1.  The  amendment  consists:  (li  In  inserting  the  words  "except  as 
otherwise  in  this  Constitution  provided"  and  the  words  "or  as  hereinafter  otherwise 
provided."  The  objecl  of  this  is  to  make  il  feasible  to  tax  certain  classes  of  property 
for  State  purposes  only  and  also  to  permit  of  earnings  taxes,  etc.,  in  lieu  of  the 
ad  valorem  tax  on  property.  (2)  In  the  omission  of  the  proviso  in  regard  to  exemp- 
tion- which  is  transferred  to  the  next  paragraph  where  all  exemptions  are  brought 


L-  REPORT  OF   commission   ON    REVENUE   and   taxation. 

cogether.  (3)  All  the  exemptions,  now  scattered  in  different  sections  of  Article 
thirteen,  are  broughl  into  Section  1.  Bui  the  exemption  granted  in  Section  10% 
(passed  in  1905)  of  $100  of  personal  property  is  omitted. 

Si  i  noNS  -  to  8,  inclusive,  are  tlif  same  as  the  < >1<  1  sections  bearing  those  numbers. 

Se<  no»  9.     The  amend nt  consists:    ill    In  making  the  board  of  equalization 

elected  al  large;  (2)  In  adding  the  words  "and  it  shall  perform  Buch  other  duties 
in  relation  to  taxation  as  this  Constitution  or  the  Legislature  may  prescribe"; 
(3)  Omitting  the  words  "The  Legislature  shall  have  power  to  redistricl  the  State 
into  four  districts,  as  nearly  equal  in  population  as  practicable,  and  to  provide  for 
the  election  of  members  of  said  board  of  equalization." 

Si  (  iio\  10.      The  amendment  consists  in  inserting  the  words  "excepl  as  otherwise 
in  this  Constitution  provided,"  and  omitting  the  following:  "The  franchise,  roadway, 

roadbed,  rails  and  rolling  stock  of  all  railroads  operated  in  more  than  one  county  in 
this   State  shall   he  assessed  by   the   State   Board   of   Equalization,   at    their  actual 

value,  and  the  same  shall  be  apportioned  to  the  counties,  cities  and  counties,  cities. 
towns,  townships,  and  districts  in  which  such  railroads  are  located,  in  proportion 
to  the  number  of  miles  of  railway  laid  in  such  counties,  cities  and  counties,  cities. 
towns,    townships,    and    districts." 

SECTION  8    11    and    lli.      Same  as   the   old   seci  ions   with    these   numbers. 

Section   13.    This  entire  section  is  new.     The  old  Section    13,  empowering  the 

Legislature  to  pass  all  laws  necessary  to  carry  out  the  provisions  <>f  this  Article, 
has  1 n  transferred  to  the  end  of  the  Article  as  Section  HI. 

SECTIONS   1  1  and  15  are  entirely  new. 


PART  II. 


DISCUSSION  Of  THE  PRESENT  SYSTEM 

OF  TAXATION. 


CHAPTER  I. 

ANALYSIS  OF  THE  PRESENT  REVENUES  OE  THE  STATE. 


Sources  upon  which  the  analysis  is  based. 

The  last  published  reports  on  the  finances  of  California  are  Reports 
of  the  Controller,  of  the  Treasurer,  and  of  the  State  Board  of  Equaliza- 
tion for  the  54th  and  55th  fiscal  years,  ending  respectively  June  30,  1903, 
and  June  30,  1904.  The  greater  part  of  the  figures  presented  in  the 
following  tables  are  taken  from  these  reports.  The  Controller's  reports 
for  the  56th  and  57th  fiscal  years,  ending  respectively  June  30,  1905, 
and  June  30,  1906,  are  due  to  be  published  at  the  same  time  as  this 
report.  Figures  supplementary  to  those  given  here  may  be  obtained  from 
that  source.  It  is  thought,  however,  that  the  figures  for  the  54th  and 
55th  fiscal  years  as  presented  below  will  serve  to  illustrate  the  general 
system  of  revenues  in  force  quite  as  well  as  would  any  later  figures. 
The  amounts  change  from  year  to  year,  but  the  proportions  remain 
approximately  the  same.  Revenues  from  new  sources,  collected  under 
statutes  passed  in  1905  and  1906,  are  separately  described  at  the  end  of 
this  chapter. 

The  revenues  of  the  State  of  California  for  the  fiscal  year  ending  June 
30,  1903,  were  less  than  those  of  a  normal  or  typical  year.  The  result 
was  a  depletion  of  many  of  the  funds,  amounting  practically  to  a  deficit. 
This  necessitated  an  increase  in  the  tax  rate  of  the  ad  valorem  tax  on 
property  for  the  fiscal  year  1904  and  made  the  revenues  of  that  year 
correspondingly  larger  than  normal.  An  average  of  the  two  will 
show  approximately  the  normal  revenues.  All  the  figures  presented 
below  are  averages  of  the  revenues  for  these  two  years. 

For  convenience  and  ease  of  reference  the  following  abbreviated 
statement,  in  round  numbers,  is  presented  first. 

CONDENSED  STATEMENT   (IN  ROUND  NUMBERS)   OF  THE  REVENUES  OF  THE 

STATE. 
Total  cash  revenues - $9,500,000 

Divided  as  follows:  .,_ 

A.  Tax,- - 17.500,000 

B.  Fees — - 300.000 

C.  Charges  by  State  institutions - 200,000 

D.  Income  of  property  and  investments 1,000,000 

E.  Earnings.. -. - - 200,000 

F.  Land  sales 250,000 

G.  Gifts, etc -- J70,000 

Total $9,500,000 

Deduct  fmm  the  above  total  the  amounts  paid  into  school  funds  and  expended 

by  the  school  districts,  not  by  the  State - 4,000,000 

Net  balance  of  State  cash  revenue - --  $5,500,000 

(N.  H.— The  new  State  High  School  Fund,  established  in  1903,  calls  for  the  collec- 
tion of  $250,000  by  the  State  of  moneys  belonging  to  and  spent  by  the  local  governments.) 


26  REPORT  OF   COMMISSION   ON    REVEN1  V.   and  TAXATION. 

DETAILED   ANALYSIS  OF  THE   REVENUES  OF  THE  STATE. 

The  average  <>f  the  "cash  receipts"  (so  called  i.  from  all  -nmv,-.  based  on 

two  years,  1903-1901 $11,032,978  84 

Deduct  revenues  not  belonging  to  the  State  and  transfers: 

1.  County   railway   taxes  collected   by   the  State  and 

turned  over  to  the  counties  (872,490  50 

_'.  Receipts  from  redemption  of  bonds  in  permanent 

rands  reinvested  therein 203,486  11 

L  Receipts  belonging  to  and  turned  back  into  the  re- 
volving funds '204.44*  <i7 

4.   Int. nst  paid  by  the  State  to  itself  as  trustee  of  school 

funds. 144,650  00 

Transfers  to  Stair  printing  office 69,279  91 

1  194,355  in 

Net  casli  receipts ._ jg  ,;-  623  65 

The  above  total  (.fit..".:;s,tiL':{.t;:))  came  from  the  following  sources: 

A.  Taxes  (all  figures  are  one  year  averages  based  on  the  two  years  1903  and  1904): 

1.  The  general  property  tax  (including  the  State  tax  mi  railroad-. 

$360.949.84) $6,819,835   19 

-•  The  poll  tax .       (64,334  89 

3.  The  inheritance  tax 288.:>!H     - 

4.  The  tax  on  foreign  tire  companies 

Total  taxes $7,572,761  96 

B.  Fees  (and  closely  analogous  charges  collected  by  State  otlic.-rs  i : 

1.  Secretary  of  State,  fees,  etc. $153,688  75 

2.  Surveyor-General  and  State  Land  Office 29,853  25 

3.  Clerk  of  Supreme  Court 9,176  12 

I.   Insurance  Commissioner  (including  tax  on  foreign  tire  companies)  68.181  00§ 

5.  Bank  Commissioners L8,283  74 

6.  Building  and  Loan  Commissioners 8,355  37 

7.  Fisli  Commissioners Ki.'.rl'.i  31 


Total  fees $298,467  54 

Collection*  by  State  Boards  and  Institutions  (of  a  miscellaneous  character 
and  incidental  to  their  administration): 

1.  Home  for  Adult  Blind $17,731  :»4 

2.  State  Commission  in  Lunacy.. 1,605  28 

3.  Whitti.T  State  School 2,486  76 

4.  Preston  School  Of  Industry 399  90 

5.  San  Jose1  Normal 36  17 

6.  Los  Angeles  Normal 448  80 

7.  Chico  Normal 1,255  63 

-    Ban  Francisco  Normal    570  82 

9.   San  DiegO  Normal    334  30 

10.  California  Polytechnic  School     1.716  06 

11.  State   Hospitals  and  Deaf.  Dumb,  and   Blind  Asylum 86,258     " 

12.  From  counties,  portion  of  board,  etc.,  of  attendants  at  State  schools  101,041  90 


T'-tal .....  

•There  lire  H  few  duplications  by  Bmaller  transfers  -till  remaining  in  this  sum.  which    can 
in >t  be  eliminated  fr.iiu  Information  contained  in  the  published  reports. 

t  This  is  the  old  collateral  Inheritance  tax.    The  proceeds  of  the  direct  ami  col  la  tern  1  Inherit- 
ance tax  began  to  come  in  in  1905.    (See  accounl  at  the  end  of  this  chapter  ) 
1  Nut  separable;    merged  in  collections  of   Insurance  Commissioner.    (8ee  account  of    new 
us  at  tin-  en.)  of  t  hi-  chapter.) 

receipts  tire  prior  to  the  new  corporation  tax  of  1905  ami   1906      (See  account   Of  new 

r.-\ .Hue  at  the  end  of  tin-  chapter.) 

further  account  of  new  revenue-  at  the  end  of  this  chapter. 


REPORT   OF    COMMISSION    ON   REVENUE    AND    TAXATION.  27 

D.    Earnings  of  State  Property  ami  Investments: 

1.  San  Francisco  Harbor $825,136  85 

2.  Yosemite  Valley 6-263  3" 

3.  Interest  on  bonds  held  in  trust  and  other  funds $252,087  21 

Less  interest  on  State  bonds  in  same - 144,650  00 

10i,43<   21 


Total.  — - -- —  -   $938,837  43 

E.  Commercial  or  Quasi-Commercial  Earnings: 

1.  Sale  of  State  school  text-books $99,448  67 

(These  receipts  are  turned  back  into  the  revolving  fund.) 

2.  Earnings  of  State  prisons 285,595  38 

!f.i6.»,U44  Uo 

Less  moneys  in  revolving  funds  - 204,448  67 

Total $180,595  38 

F.  Sale  of  State  Lands  (including  interest  on  unpaid  principal) $261,877  92 

G.  Gifts  and  Escheats: 

1.  From  the  Federal  Government  for  Veterans'  Home $62,634  92 

2    Escheats  4,074  45 

$66,709  37 

H.     Miscellaneous  (composed   mainly  of    "money  returned,"   sale  of    old 

materials  or  special  deposits)  . $5,481  16 

(N.  B.— The  footing  of  the  classified  items  is  $9,538,621.64,  which  is  $2.01  less  than  the 
total  given  above;  the  discrepancy  has  not  been  accounted  for.) 

School  moneys  not  properly  State  revenues. 

A  considerable  part  (over  42%)  of  the  above  are  State  revenues,  only 
in  the  sense  that  they  are  collected  by  the  State,  as  agent  for  the  local 
governments. 

The  following  items  should  therefore  be  deducted  in  order  to  arrive 
at  the  true  total  of  moneys  collected  and  spent  upon  the  State  govern- 
ment proper: 

Total  classified  items  State  revenues. .. $9,538,621  64 

1.  The  School  Fund .       $3,663,940  08 

2.  The  School  Land  Fund --.-       433,205  51 

3.  The  School  Land  Deposit  Fund 15,490  00 

4,112,635  59 


Total - $5,425,!  186  05 

True  cash  revenues  State  government 5,425,986  05 

Beginning  with  the  fifty-fifth  fiscal  year  the  State  High  School  Fund, 
amounting  in  that  year  to  $232,386.85,  should  also  be  deducted. 

The  School  Fund  is  deducted  because,  save  for  the  supervision  exer- 
cised by  the  State  Superintendent  of  Public  Instruction  and  the  State 
Board  of  Education,  the  control  and  management  of  the  schools  is  a 
matter  of  local  government  solely.  The  State  collects,  apportions  and 
disburses  the  school  moneys  as  an  agent  for  the  districts.  The  purpose 
is  merely  to  bring  about  uniformity  in  the  school  facilities  all  over  the 
State  and  to  let  the  richer  districts  help  out  the  poorer.  The  manage- 
ment of  the  schools  is  a  matter  of  local  and  not  State  government; 
and  these  moneys  should  be  regarded  as  local  and  not  State  revenues, 
even  though  nominally  levied  by  the  State. 


28  REPORT   OF   COMMISSION   ON    REVENUE   AND   TAXATION. 

The  School  Land  Fund  and  its  contributory  fund,  the  School  Land 
Deposit  Fund,  are  deducted  because  both  of  these  items  are  annually 
added  to  the  amount  held  in  trust  and  invested  for  the  benefit  of  the 
schools,  the  interest  being  paid  to  the  State  School  Fund.  They  are 
therefore  Local  funds  of  which  the  State  acts  as  trustee. 

The  new  High  School  Fund,  calling  for  about  $250,000  per  annum, 
Is  Likewise  Local  revenue.  It  could  not  be  deducted  above,  because  it 
was  collected  for  the  first  time  in  1903-4.  and  the  above  items  are  aver- 
-  for  the  two  years  1902-3  and  1903-4. 

Resume. 

The  State  government,  then,  may  be  said  to  enjoy  an  annual  income 
of  $5,500,000.  Of  this,  $2,000,000  comes  from  its  own  property  and 
investments:  $750,000  from  the  poll  and  inheritance  taxes,  and 
$2,750,000  from  the  ad  valorem  tax  on  property. 

It  is  this  last  sum— $2,750,000  to  $3,000,000  —the  collection  of  which 
is  most  in  need  of  reform. 

The  necessary  cost  of  the  State  government. 

Governor  Pardee  was  asked  the  question  whether  the  State  govern- 
ment could  not  be  run  for  less  than  the  seven  to  eight  millions  which, 
including  school  moneys,  was  levied  by  the  Legislature  of  1905.  His 
reply  was  that  it  could  be  run  for  nearly  a  million  less.  His  reasons 
wi  re  as  follows: 

"  Upon  assuming  the  office  of  Governor  I  found  myself  confronted 

with  a  deficit  of  about  one  and  a  half  millions  of  dollars.     In  order  to 

make  up  this  deficit,  so  that  the  State's  bills  might  be  promptly  met, 

we  borrowed  from  other  funds.     To  restore  to  these  funds  the  money 

thus   borrowed,  each  of   our  first  two  tax  levies  had  to  be  increased 

6  cents — 12  cents  in  all.     Nevertheless,  we  have  put  into  permanent 

improvements,  by  legislative  appropriation,  a  sum  only  about  a  quarter 

of  a  million  dollars  ($250,000)  less  than  the  combined  appropriations 

for  similar  purposes  for    the   three    preceding  administrations.       The 

figures  are  as  follows: 

Markham $1,443,764  57 

Budd 1,140,375  27 

Gage 826,743  83 

Total  for  three  administrations $3,410,883  67 

Pardee $8,191,872  Tit 

"Our  tax  Levies,  nevertheless,  have  not  been  excessive.  The  figures 
are  as  follows: 

Markham 44.4      43.4       57.6       49.3 

Budd 68.5        42.9        51.0        48.8 

Cage... 60.1        49.8        48.0        38.2 

Pardee 56.1        53.1        49.0        47.6 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  29 

"If  the  first  two  Pardee  levies  were  reduced  by  the  12  cents  which, 

as  explained  above,  had  to  be  levied,  to  make  up  a  deficiency  left  to  us 

by  our  predecessor,  our  average  levy  would  have  been  3  cents  lower 

than  it  is.     Yet  the  averages,  as  the  figures  stand,  are, 

Markham 48.7 

Budd ---- 52.8 

Gage --- --.- 49.0 

Pardee - - 51.4 

"Taking  3  cents  from  our  average  levy  would  leave  us  with  an 
average  of  48.4,  lower  than  the  average  of  the  preceding  twelve  years. 
Yet,  as  shown  above,  we  appropriated  within  a  quarter  of  a  million 
dollars  as  much  money  for  permanent  improvements  as  our  three 
predecessors  combined. 

"  But,  besides  doing  this,  we  have  accumulated,  as  should  be  done 
in  every  large  business,  a  reserve  fund  of  about  one  million  dollars 
($1,000,000)  over  and  above  all  our  liabilities.  Therefore,  if  we  had  had 
no  deficit  to  meet  and  had  accumulated  no  surplus,  the  State,  even 
with  the  very  large  appropriations  for  permanent  improvements  (over 
$3,000,000),  could  have  been  run  for  something  like  two  and  a  half 
millions  of  dollars  ($2,500,000)  less  than  it  has  cost  us  the  past  four 
years.  There  will  be  no  deficit  for  my  successor  to  meet;  he  will  have 
$1,000,000  surplus;  and,  as  I  see  it  now,  he  will  not  be  compelled  to  put 
as  much  money  as  I  have  into  permanent  improvements.  The  State 
can  then  be  run  for  the  next  four  years  for  a  million  and  a  half  (old 
deficit),  plus  a  million  (our  surplus),  plus  a  million  (smaller  permanent 
improvements),  total  $3,500,000,  or  an  average,  for  the  four  years,  of 
about  $900,000  per  annum. 

"I  think  these  figures  are  liberal.  In  fact,  it  seems  to  me  they  could 
be  made  considerably  smaller." 

New  sources  of  revenue. 

The  Legislature,  in  the  regular  sessions  of  1903  and  1905,  and  again, 
in  special  session,  1906,  made  several  important  changes  in  the  revenue 
laws  of  the  State.  These  resulted  in  new  or  increased  revenues  from 
the  following  sources: 

1.  Taxation  of  insurance  companies. 

2.  Taxation  of  inheritances. 

3.  An  annual  license  or  registration  fee  on  corporations. 

The  tax  on  insurance  premiums. 

In  1903,  taking  effect  January  1,  1904,  a  tax  of  2%  was  imposed  on 
the  net  premium  receipts  of  all  foreign  insurance  companies  other  than 
life. 

Thie  increased  the  State's  revenue  from  the  taxation  of  insurance 
companies  by  about  $65,000. 


REPORT   OF   COMMISSION    ON    RBVENUB   AND   TAXATION. 

In  L905  a  similar  tax  of  1%  was  imposed  on  the  premiums  of  foreign 
life  insurance  companies.    This  produces  another  $80,000  per  annum. 

Inasmuch,  however,  as  the  companies  may  deduct  losses  paid  from 
premiums  received  hefore  determining  the  taxable  remainder,  there  will 
be  verv  little  revenue  from  the  taxation  of  tire  insurance  companies  for 
the  premiums  received  in  1906,  owing  to  the  fact  that  the  losses  incurred 
in  San  Francisco  will  in  almost  all  cases  exceed  the  premiums  collected. 

The  taxation  of  inheritances. 

The  old  inheritance  tax  of  California  which  began  to  yield  revenue  in 
is1.).")  was  a  "collateral"  inheritance  tax.  In  1905  the  tax  was  extended 
to  direct  heirs  as  well,  and  the  rates  were  extensively  revised. 

The  result  will  be  an  increase — in  the  long  run — of  the  revenues  from 
this  source. 

But  the  revenues  from  an  inheritance  tax  are  always  uncertain  and 
fluctuating.     They  vary  greatly  from  year  to  year. 

The  following  table  shows  the  collections  under  the  California 
inheritance  tax: 

Revenue  from  the  Inheritance  Tax. 
Year  Ending- 
June  80,  1894  (December  30,  1893,  to  May  4,  1894) $1,365  26 

June  3d,  1895 --  32,787  70 

June  30,  1896 102,670  95 

June  30,  1897 60,667  13 

June  30,  1898 - - 83,550  21 

June  30,  1899 157,734  54 

June  30,  1900 - - 385,362  07 

June30,1901 - - 243,586  44 

June  30,  1902 - 287,053  40 

June  30,  1903 290,447  44 

June  30,  1904 - - 286,735  72 

June  30,  1905 - 532,760  16 

JuneSO,  1906 292.750  01 

Of  the  collections  in  1906,  amounting  to  $292,750,  only  about  $22,000 
was  under  the  law  of  1905;  all  the  rest  was  collected  under  the  law  of 
1893. 

The  annual  license  tax  on  corporations. 

In  1905  an  annual  license"  tax  of  $10  was  imposed  on  all  corporations, 

domestic  or  foreign,  doing  business  in  California. 

In  li)06  this  tax  was  increased  to  $20. 

The  total  collections  under  the  old  law  were  $138,905. 

The  total  collections  under  the  new  law  to  July  27,  1906,  were 
$78,805. 

This  tax  should  yield  a  revenue  of  about  $280,000  per  annum,  from 
this  time  on. 


REPORT   OF   COMMISSION    ON    REVENUE    AND   TAXATION.  31 


CHAPTER  II. 


ANALYSIS  OF  THE  REVENUE  LAWS  OE  CALIFORNIA,  WITH 
COMMENTS  ON  THEIR  OPERATION. 


The  revenue  laws  may  be  classified  as  follows: 

I.     Those  dealing  with  taxes: 

1.  The  general  property  tax. 

2.  The  poll  tax. 

3.  The  inheritance  tax. 

4.  The  tax  on  insurance  premiums. 

5.  Business  taxes  and  licenses. 

6.  The  income  tax. 

II.     Those  dealing  with  revenues  other  than  taxes: 

1.  Fees  and  analogous  charges  collected  by  State  officers,  includ- 

ing the  so-called  license  tax  on  corporations. 

2.  Collections  by  State  boards  and  State  institutions. 

3.  Income  obtained  from  the  rental  of  State  property. 

4.  Income  from  commercial  or  quasi-commercial  earnings. 

5.  Income  from  the  sale  of  State  land>. 

6.  "Gifts,"  "Escheats,"  etc. 

Although  the  main  provisions  of  our  revenue  laws  are  fairly  well 
known,  a  resume  of  them  will  be  essential  to  a  clear  statement  of  the 
lines  of  reform. 

They  will  be  summarized  and  discussed  under  the  foregoing  headings. 

A.     TAXES. 

I.     GENERAL  PROPERTY  TAX. 

This  tax  is  the  principal  source  of  revenue  for  State,  county,  and 
municipal  purposes  in  California.  It  affords  80%  of  the  entire  revenues 
of  the  State.  The  State  and  the  counties  together  collect  from  this 
source  alone  over  .$25,000,000  per  annum.  The  cities  collect  over 
$12,000,000  more,  making  in  all  nearly  $38,000,000  annually  from  this 
one  tax. 

The  tax  for  State  and  county  purposes  is  based  upon  an  assessment 
or  valuation  of  the  property  within  the  jurisdiction  of  the  State,  made 
annually  in  part   by  the  county  assessors   and  in   part   by  the  State 


32  REPORT  OF   COMMISSION   OX    REVENUE   AND   TAXATION. 

Board  of  Equalization.     In  many  towns  ami  cities  there  is  a  separate 
assessment  or  valuation  for  municipal  taxes. 

Annual  assessment  of  real  estate  unnecessary. 

It  appears  to  the  Commission  that  there  is  no  necessity  for  an  annual 
revision  of  the  assessment  roll,  at  least  so  far  a<  real  estate  is  concerned , 
and  that  once  .very  two  years  is  sufficiently  frequent.  This  could  be 
made  to  resull  iii  a  very  material  reduction  in  the  expense  of  adminis- 
tering our  revenue  laws.  A  resume  of  the  practice  of  other  Mates  in 
this  regard,  a  statement  of  the  present  cost  of  assessing  and  collecting 
taxes,  and  recommendations  in  connection  therewith,  will  be  found  in 
Chapter  X  of  Part  III  of  this  Report, 

Separate  municipal  assessment  unnecessary. 

It  appears  to  the  Commission,  furthermore,  that  there  is  no  necessity 
for  a  separate  assessment  or  valuation  of  property  for  city  taxation,  in 
any  cities.  Such  duplication  of  work  is  not  only  a  waste  of  public 
money,  but  works  positive  harm  by  introducing  confusion  as  to  valua- 
tions and  inequalities  between  cities.  By  levying  all  city  taxes  on  the 
county  roll  and  requiring  the  county  tax  collector  to  collect  and  turn 
over  to  the  cities  all  moneys  due  them  for  such  taxes,  we  would  save  the 
entire  expense  of  the  city  assessor's  and  city  tax  collector's  offices.  This 
Bavin g  could  be  made  without  any  appreciable  increase  in  the  cost  of 
maintaining  the  county  offices.  It  takes  no  more  time  or  labor  to  com- 
pute the  county  and  city  taxes  together  at  the  county  rate,  say  90  cents, 
plus  the  city  rate,  say  85  cents,  or  $1.75  in  all,  than  it  does  to  compute 
the  county  taxes  alone.  Nor  does  it  cost  any  more  time  or  labor  to 
collect  a  tax  bill  of  say  $17.50  than  it  does  one  of  $i).00.  Furthermore, 
the  taxpayer  would  be  saved  the  necessity  of  getting  and  separately 
paying  two  tax  bills.  He  could  pay  all  in  one  bill,  at  one  place  at  the 
Bame  time.  This  means  a  considerable  saving  to  the  taxpayers  in  time, 
trouble,  and  expense.  What  good  purpose  can  possibly  be  served,  for 
example,  by  requiring  a  resident  of  Berkeley  to  go  or  send  to  Oakland 
to  pay  his  county  taxes  and  then  to  the  city  hall  in  Berkeley  to  pay  his 
city  taxes,  when  with  greater  economy  to  the  government  he  might  be 
allowed  to  pay  them  all  in  one  bill  at  one  time  and  place? 

Recommendations  in  regard  to  this  feature  of  the  law  will  be  found 
in  Chapter  X  of  Part  III. 


REPORT   OF    COMMISSION    OX    REVENUE    AND    TAXATION.  33 

The  assessment  of  property. 

The  following  table  shows  the  assessed  valuation  in  detail  for  each  of 
the  last  four  years  for  which  published  reports  are  available: 

Percentage  of 
Total  Assessed 
1902-03.  Valuation. 

Real  estate $851,773,727  53.3 

[improvements  .. 369,769,757  23.1 

Real  estate  and  improvements .$1,221,543,484  76.4 

Personal  property $269,325,704  16.9 

Money  and  credits 42,894,994  2.7 

Personal  property  and  money 312,220,698  19.6 

Railroads til.lsii.u5S  4.0 


56.9 

20.4 

77.3 

15.5 

2.7 

18.2 

4.5 

Total  assessed  valuation $1,597,944,240  100.0 

1903-04. 

Real  estate $880,821,353 

Improvements 315,765,059 

Real  estate  and  improvements $1,196,586,412 

Personal  property $239,521,774 

Money  and  credits    42,921,033 

Personal  property  and  money 282,442,807 

Railroads 69,669,566 

Total  assessed  valuation $1,548,698,785  100.0 

1904-05. 

Real  estate $925,233,627 

Improvements 348,162,635 

Real  estate  and  improvements $1,273,396,262 

Personal  property $239,062,273 

Money  and  credits 42,713,021 

Personal  property  and  money 281,775,294 

Railroads 69,820,186 

Total  assessed  valuation $1,624,991,742  100.0 

1905-06. 

Real  estate $917,864,847 

Improvements 325.i44.nso 

I;.  .1  estate  and  improvements $1,243,809,832 

Personal  property $238,006,160 

Money  and  credits 31,955,094 

Personal  property  and  money 269,961,254 

Railroad- 81,010,sm 

Total  assessed  valuation $1,594,781,905  100.00 

3-RT 


56.9 

21.5 

78.4 

14.71 

2.63 

17.3 

4.3 

57.55 

20.44 

77.99 

2.00 

16.93 

5.08 

34  BEPOBT  OP   COMMISSION   ON   REVENUE  AND   TAXATION. 

Per  capita  assessed  valuation  and  taxes. 

The  total  population  of  California  in  1903,  as  estimated  by  the  United 
States  Census  Bureau,  was  1,564,286.  Using  the  same  method  as  was 
followed  by  the  Census  Bureau,  the  population  in  1904  was  1,590,786, 
and  in  1905  1,617,800. 

Per  Capita  Assessed  Valuation  and  State  and  County  Taxes  on  Property. 

Per  Capita  Total  State  ami      Per  Capita 

Assessed  County  Taxes        Taxes  on 

Population.        Assessed  Valuation.      Valuation.  onPropc-m.          Property. 

1903    ..1,564,286               $1,597,944,240               $1,021  $25,282,931               $16  14 

1904 ...1,590,786                 1,548,698,785                    974  25,669,400                 16  16 

L906.     .1,617,800                1,624,991,742                1,004  Data  not  yet  available 

The  assessment  roll. 

Full  details  concerning  the  assessed  valuation  of  each  of  the  different 
classes  of  property  are  given  in  the  biennial  reports  of  the  Controller. 
The  essential  facts  are  displayed  in  the  accompanying  chart. 

The  upper  one  of  the  three  groups  of  lines,  the  one  marked  "Rates 
of  Increase  in  Assessment  Roll,"  shows  by  its  angle  each  year  the 
percentage  of  increase  (or  decrease)  of  that  year  on  the  total  roll  of 
the  year  before.  The  heavy  line  shows  the  general  trend  cleared  of  the 
disturbing  annual  fluctuations.  It  demonstrates  that  the  total  assessed 
valuation  of  property  is  not  advancing  as  rapidly  as  it  used  to  or  as  it 
should.  This  group  of  lines,  while  it  may  be  somewhat  novel  in  form, 
really  presents  a  better  and  truer  picture  of  the  growth  of  our  assess- 
ment roll  than  the  ordinary  method.  For  example,  an  increase  of  fifty 
millions  in  the  tax  roll  in  the  fifties,  when  the  whole  roll  was  small, 
meant  a  great  deal ;  it  may  have  been  an  increase  of  seventy-five  or  a 
hundred  per  cent,  while  an  increase  of  the  same  amount  in  1904  is  quite 
insignificant,  only  a  little  over  3%.  The  upper  line  shows  these 
increases  in  their  proper  proportions. 

The  middle  set  of  lines  shows  the  total  assessed  valuation  in  the 
ordinary  way.  The  heavy  line  shows  the  trend.  These  lines  present  the 
same  facts  as  the  upper  line,  but  do  not  bring  out  the  rates  of  increase, 
merely  the  absolute  amounts. 

The  bottom  line  shows  the  assessment  of  personal  property. 


36  REPORT  OF   COMMISSION   ON    REVENUE   AND  TAXATION. 

Abstract  of  the  Principal  Provisions  of  the  Laws  regarding  the 

General  Property  Tax. 

1.  Property  subject  to  this  tax. 

The  Constitution  requites  that  this  tax  shall  be  levied  on  all  property 
i i,  the  State  not  specifically  exempted.  The  term  "all  property  in  the 
State"  excludes  realty  and  certain  tangible  personal  property  located 

in  another  State,  even  when  belonging  to  residents  of  California,  hut  it 
includes  all  personal  property  belonging  to  residents  of  California  that 
takes  it-  legal  situ-  at  the  residence  of  its  owner.  The  statutes  extend 
this  tax  to  personal  property  belonging  to  residents,  even  when  taxed 
outside  the  State  in  the  case  of  stocks  and  bonds  of  foreign  corporations; 
and  the  courts  have  also  construed  the  law  so  as  to  authorize  the  taxa- 
tion of  credits  or  amounts  due  residents  of  the  State  by  persons  outside 
the  State. 

Comparatively  little  property  in  the  form  of  stocks  and  bonds  of 
foreign  corporations  or  of  credits  or  amounts  due  to  residents  of  the 
State  by  persons  outside  the  State  is  ever  placed  on  the  assessment  rolls. 
When  any  is  assessed  it  is  usually  evidence  of  inequality.  Further- 
more, the  mere  fad  that  this  class  of  property  is  taxable  -although  not 
often  taxed — has  serious  harmful  consequences  to  the  banks  and  other 
business  interests. 

The  Commission  is  of  the  opinion  that  this  feature  of  the  law  should 
he  repealed.  Full  consideration  of  this  subject  is  presented  in  Chapter 
IX  of  Part  III  of  this  Report. 

a.  Definition  and  classification  of  property  for  purposes  of  taxation. 

The  following  classes  of  property  are  specially  defined  for  purposes 
of  taxation: 

(1)  I'ralty,  which  includes  the  possession  of.  claim  to,  ownership  of, 
or  right  to,  the  possession  of  land;  all  mines,  minerals,  and  quarries  in 
and  under  the  land,  all  timber  belonging  to  individuals  and  corpora- 
tions, growing  or  being  on  the  lands  of  the  United  States,  and  all 
privileges  appertaining  thereto;  all  mortgages  and  other  liens  upon 
land;  water  ditches  constructed  for  mining,  manufacturing,  or  irriga- 
ting purposes,  and  wagon  ami  turnpike  toll  roads. 

(2)  Improvements  upon  land,  although  defined  as  real  estate,  are  sepa- 
rately treated  as  if  a  class  by  themselves.  They  include:  all  buildings, 
structures,  fixtures,  and  fences  erected  upon  or  affixed  to  the  land,  except 
telephone  and  telegraph  lines;  also  all  fruit,  nut-hearing,  or  ornamental 
trees  and  vine-,  not  of  natural  growth,  excepting  fruit  and  nut-bearing 
trees  under  four  years  of  age,  and  grapevines  under  three  years  of  age, 
and  by  a  recent  statute  they  also  include  alfalfa  after  the  first  year  of 
planting. 


REPORT   OF   COMMISSION'    ON    REVENUE    AND    TAXATION.  :^~ 

(3)  Personal  property,  which  includes  moneys,  credits,  bonds,  stocks, 
dues,  franchises,  and  everything  capable  of  private  ownership  not 
included  within  the  term  "real  estate";  also  telegraph  and  telephone 
lines.  The  term  "credits"  is  defined  to  mean  those  solvent  debts  not 
secured  by  mortgage  or  trust  deed  owing  to  the  person,  firm,  or  corpora- 
tion taxable.  The  stocks  and  bonds  of  California  corporations  are  not 
included  in  this  definition  and  are  not  taxable,  it  being  held  that  they 
represent  the  property  taxed  to  the  corporations. 

(4)  Exemptions. — The  Legislature  can  not  exempt  any  property  from 
taxation.  That  can  be  done  only  by  constitutional  provision.  The 
Legislature  is  further  expressly  prohibited  by  the  Constitution  from 
exempting  any  county,  city,  or  town,  or  the  inhabitants  or  property 
therein,  from  its  or  their  proportionate  share  of  taxes  to  be  levied  for 
State  purposes. 

Exempt  from  taxation  by  provision  of  the  Constitution  are : 

(1)  Property  that  is  exempt  because  of  its  public  character. 
All  property  exempt  under  the  laws  of  the  United  States. 

All  public  property,  whether  belonging  to  the  United  States,  to 
California,  to  any  county,  or  to  any  municipality  within  the  State, 
down  to  and  including  irrigation  and  reclamation  districts. 

All  property  used  for  free  public  libraries  and  free  museums,  or 
used  exclusively  for  public  schools. 

Bonds  issued  by  the  State  of  California,  or  any  county,  city  and 
county,  or  municipal  corporation  or  district,  including  school,  irri- 
gation and  reclamation  districts. 

The  property  of  the  California  Academy  of  Sciences. 

The  property  of  Leland  Stanford  Junior  University. 

The  property  of  the  California  School  of  Mechanical  Arts. 

(2)  Property  exempt  for  religious  reasons. 

The  buildings,  and  so  much  of  the  real  property  on  which  they 
are  situated  as  may  be  required  for  the  convenient  use  and  occupa- 
tion of  said  buildings,  when  the  same  are  used  solely  and  exclu- 
sively for  religious  worship. 

(3)  Property  exempt  for  economic  or  political  reasons. 

Growing  crop-. 

Fruit  and  nut-bearing  trees  under  the  age  of  four  years  from 
time  of  planting  in  orchard  form. 

Grapevines  under  the  age  of  three  years  from  time  of  planting 
in  vineyard  form. 

Any  personal  property  of  any  householder  to  the  amount  of  $100. 


38  REPORT  OF   COMMISSION   ON   REVENUE   AND   TAXATION. 

b.  Assessment  or  valuation. 

The  Constitution  provides  that  all  property  in  the  State  shall  be 
taxed  in  proportion  to  its  value,  to  be  ascertained  as  provided  by  law; 
ami  all  property,  except  certain  property  of  railroads,  is  assessed  or 
valued  for  State  and  county  taxes  once  every  year  by  the  county  assess- 
ors. The  railroad  property  just  referred  to  is  also  assessed  annually, 
hut  by  the  State  Board  of  Equalization. 

The  assessment  or  valuation  is  to  be  made  "as  of  the  first  Monday 
in  March,"  property  accumulated  after  that  date  not  being  subject  to 
taxation  until  the  succeeding  year. 

The  statute  requires  that  all  taxable  property  shall  be  assessed  at  its 
full  cash  value,  and  the  term  "full  cash  value"  has  been  defined  to 
mean  the  amount  at  which  the  property  would  be  taken  in  payment  of 
a  just  debt  due  from  a  solvent  debtor.  It  is  not  the  amount  which  the 
property  would  bring  at  a  forced  sale.  The  very  common  failure  of 
the  assessors  to  observe  the  requirements  of  the  law  in  regard  to  the 
valuation  leads  to  serious  inequalities.  These  will  he  discussed  in 
Chapter  III  of  Part  II  of  this  Report. 

Land  and  improvements  thereon  are  to  be  separately  assessed.  Cul- 
tivated and  uncultivated  lands  of  the  same  quality  and  similarly 
situated  are  to  be  assessed  at  the  same  value. 

When  property  is  subject  to  a  mortgage,  unless  it  be  property 
belonging  to  a  railroad,  or  to  other  quasi-public  corporations  such  as 
water  companies,  telegraph,  toll-bridge,  toll-road,  ferry  companies,  and 
the  like,  the  mortgage  is  to  be  assessed  in  the  name  of  the  mortgagee, 
while  the  difference  between  the  assessed  value  of  the  mortgage  and 
the  true  value  of  the  property  is  assessed  to  the  mortgagor. 

To  aid  the  assessor  in  making  a  roll  of  the  taxable  property,  he  is 
required  to  exact  from  each  person  a  statement  under  oath  setting 
forth  in  detail  all  the  real  and  personal  property  owned  by  such  person, 
or  in  his  possession  or  under  his  control  at  twelve  o'clock  noon  on  the 
first  Monday  in  March.  Except  in  the  case  of  property  which  could 
not  be  described  other  than  by  a  statement  of  its  value,  as,  for  example, 
credits,  money,  and  the  like,  the  taxpayer  is  not  required  to  value  his 
property,  the  determination  of  its  value  being  the  duty  of  the  assessor. 
Any  information  as  to  the  value  furnished  by  the  taxpayer  in  his  state- 
ment is,  therefore,  idle  information,  and,  even  when  given  under  oath 
at  the  demand  of  the  assessor,  is  not  bindingupon  the  assessor.  The 
assessor  is  required  to  exercise  his  best  judgment  in  determining  the 
value  of  the  property  to  be  assessed,  and  the  valuation  placed  thereon 
by  liim  will  not  be  reviewed  by  the  courts  except  in  eases  where  fraud 
has  been  proven,  but  the  decision  of  the  assessor  may  be  reviewed  by 
the    hoards   of  equalization.      Any   taxpayer    who  negleets  or  refuses  to 


REPORT   OP   COMMISSION   ON   REVENUE  AND   TAXATION.  39 

give  under  oath  the  statement  of  his  property  required  for  the  use  of 
the  assessor  loses  his  rights  before  the  board  of  equalization  and  may- 
be assessed  in  an  arbitrary  amount  by  the  assessor. 

Assessment  of  railroad  property. 

The  property  of  railroads,  above  referred  to  as  being  assessed  or  valued 
by  the  State  Board  of  Equalization,  consists  of  the  franchises,  roadway, 
roadbed,  rails,  and  rolling  stock  of  all  railroads  operated  in  more  than 
one  county.  The  assessment  of  this  property,  made  by  the  State  Board 
of  Equalization,  is  apportioned  to  the  counties  and  other  subdivisions  in 
proportion  to  the  number  of  miles  of  railway  in  each  county  or  subdi- 
vision thereof.  The  apportionment  to  the  counties  is  made  by  the  State 
Board  of  Equalization,  while  the  boards  of  supervisors  in  each  county 
make  the  apportionment  to  the  lesser  taxation  districts. 

While  in  the  main  these  provisions  make  a  fairly  clear  distinction 
between  the  subjects  which  are  to  be  assessed  by  the  State  Board  and 
those  to  be  assessed  by  the  county  assessors,  some  conflicts  of  authority 
have  arisen.  Some  of  the  more  important  points  have  recently  been 
decided  by  the  Supreme  Court  in  the  case  of  San  Francisco  &  San  Joa- 
quin Ry.  Co.  vs.  City  of  Stockton. 

Under  this  decision  all  improvements  erected  on  space  covered  by  the 
right  of  way,  as  well  as  tangible  property  lying  outside  the  limits  of  the 
right  of  way,  even  though  such  improvements  and  property  be  absolutely 
indispensable  to  the  operation  of  the  road,  are  locally  assessable.  Road- 
way is  taken  to  mean  the  continuous  strip  of  land  upon  which  the  road 
is  constructed,  and  Civil  Code,  Section  465,  subdivision  4,  does  not 
broaden  this  term,  when  it  authorizes  railroads  to  lay  out  their  roads  not 
exceeding  nine  rods  in  width  and  to  construct  and  maintain  the  same 
with  such  appendages  and  adjuncts  as  may  be  necessary.  Land  for 
cattle  3rards,  switch  yards,  and  depots  are  not  roadway  and  are  locally 
assessable.  Unfinished  tracks  intended  for  future  roadway  are  locally 
assessable. 

Miscellaneous  provisions. 

Possessory  claims  to  lands  sold  by  the  State  or  the  United  States  for 
which  no  patent  has  been  issued  are  assessed  in  the  same  manner  as 
other  lands,  but  the  owner  is  entitled  to  a  deduction  from  their  value 
of  the  amount  still  due. 

Lands  are  assessed  in  parcels  not  to  exceed  640  acres  and,  when  sec- 
tionized  by  the  United  States  Government,  are  to  be  assessed  by  sections 
or  fractions  of  sections.  When  in  towns  and  cities  there  are  subdivi- 
sions of  land  platted  or  divided  into  lots  or  blocks,  the  assessment  may 
be  made  in  accordance  with  these  subdivisions. 

Water  ditches  constructed  for  mining,  manufacturing,  or  irrigation 


40  BEPOBT  OF   COMMISSION   ON    REVEN1  i:   AND   TAXATION. 

purposes,  and  wagon  and  "turnpike  toll-roads  are  to  be  assessed  as  real 
estate  at  :i  rate  per  mile  for  thai  portion  of  the  property  lying  within 
h  county. 

Deduction  of  debts. 

The  taxpayer  enjoys  a  deduction  from  the  assessed  value  of  his  sol- 
vent credits  equal  to  the  amount  of  debts  due  bona  fide  residents  of  the 
State. 

This  provisioD  works  a  number  of  evils.  It  practically  prevents  the 
assessment  of  any  moneys  or  credits.  In  particular  it  makes  it  difficult 
— if  not  impossible  to  assess  hanks  fairly.  (See  Chapter  IX  in  Part 
III  and  Chapter  VI  in  Part  III  of  this  Report.) 

Deposits  in  savings  and  loan  societies  are  not  assessable  to  the 
depositor,  but  such  banks  are  taxable  upon  all  their  holdings  without 
deduction  for  deposits.  Deposits  in  commercial  banks  are,  however, 
taxable  to  the  depositors,  and  such  banks  are  allowed  to  deduct  from 
their  solvent  credits  the  amount  due  depositors  as  debts.  Bank  deposits 
are,  however,  very  rarely  taxed. 

Shares  of  stock  in  corporations. 

It  is  a  general  rule  that  no  assessment  is  made  of  the  shares  of  stock 
in  any  California  corporation,  the  statutes  declaring  that  shares  of  stock 
in  corporations  possess  no  intrinsic  value  over  and  above  the  actual 
value  of  the  property  of  the  corporation  which  they  stand  for  and  rep- 
resent, and  that  the  assessment  and  taxation  of  such  shares  along  with 
all  the  corporate  property  would  be  double  taxation.  Corporations  are 
taxable  on  all  their  property,  but  the  stocks  and  bonds,  per  se,  are  to  be 
ignored.  By  an  amendment  made  to  the  statutes  in  1899  an  exception 
to  this  rule  was  made  in  the  case  of  the  shares  of  stock  of  national 
banks.  The  stockholders  in  national  banking  associations  located  in 
the  State  were  to  be  assessed  and  taxed  on  the  value  of  their  shares  of 
stock  at  the  place  where  the  bank  is  located,  at  a  valuation  which  should 
allow  for  deduction  from  the  aggregate  capital  of  the  amount  of  real 
estate  assessed  to  the  bank,  and  included  only  so  much  of  the  solvent 
credits  as  exceeded  the  debts  due  bona  fide  residents  of  the  State.  This 
provision  of  the  statute  was  nullified  by  a  decision  of  the  United  States 
Supreme  Court,  February '27,  1 '.)()">,  in  the  ease  ^iSan  Franrisro  Xatinnal 
Hanky*.  Ihnhjr  (assessor  City  and  County  of  San  Francisco),  25  Sup. 
Ct.  Rep.  384.  For  further  discussion  of  this  case,  see  Chapter  VI  in 
Part  HI. 

Telegraph  and  telephone  lines. 

Telegraph  and  telephone  lines,  while  assessed  as  personal  property, 
an-  tn  be  described  in  the  same  manner  as  real  estate  is  described  and 
assessed  by  the  local  or  county  assessor  a1  a  uniform  rate  per  mile  for 
that  portion  of  the  property   which  lies  within  his  county. 


REPORT   OF   COMMISSION   ON    REVENUE   AND   TAXATION.  41 

Car  and  express  companies. 

Unlike  many  other  states,  California  has  no  special  method  for  the 
assessment  of  freight  car,  express  and  similar  transportation  companies. 
These  are  assessed  by  the  county  assessors  in  the  same  manner  as  are 
other  corporations.  The  Pullman  Company  is,  however,  assessed  by  the 
State  Board  of  Equalization  as  a  railroad  operating  in  more  than  one 
county. 

Vessels. 

Vessels  that  are  required  to  be  registered,  excepting  ferryboats,  are 
assessed  in  the  county  where  they  are  registered  or  licensed;  and  vessels 
registered  out  of  the  State,  but  plying  in  its  waters,  are  assessed  in  this 
State,  if  the  owner  resides  here. 

Franchises. 

Franchises  are  especially  defined  as  property  and  are  to  be  assessed 
by  the  county  assessor,  except  those  of  railroads  operated  in  more  than 
one  county,  which  are  assessed  by  the  State  Board  of  Equalization. 
The  United  States  Supreme  Court  has  decided  that  franchises  granted 
by  the  United  States  are  not  taxable.  It  was  generally  assumed  until 
recently  that  the  only  taxable  franchises  were  those  granting  special 
privileges,  such  as  are  enjoyed  by  water  companies,  gas  companies, 
railroads,  and  the  like.  But  the  Supreme  Court  of  California  has 
recently  decided  that  even  the  franchise  of  a  banking  corporation  is 
covered  by  the  definition  of  a  taxable  franchise.  The  method  for  the 
valuation  of  franchises  that  has  been  approved  by  the  State  courts  is  to 
deduct  the  value  of  all  tangible  property,  otherwise  assessed,  from  the 
value  of  the  stocks  and  bonds  together,  the  remainder  thus  obtained 
being  considered  the  value  of  the  franchise. 

Under  Section  3628  of  the  Political  Code  it  was  provided  that  the 
franchise  of  a  corporation  should  be  assessed  only  at  the  place  where 
the  :' principal  place  of  business"  of  the  corporation  was  situated. 

In  a  recent  case,  Stockton  Gas  and  Electric  Company  vs.  County  of 
San  Joaquin,  decided  December  14,  1905,  the  Supreme  Court  held  that 
"the  franchise  extended  by  the  Constitution  is  of  such  a  character  that 
it  is  indissolubly  annexed  to  the  streets  of  the  city  in  and  upon  which 
it  is  exercised,  and  that,  while  an  incorporeal  hereditament,  it  is,  in 
contemplation  of  law,  real  property;  an  easement  appurtenant  to  such 
streets.  This  being  so.  it  necessarily,  as  real  property,  has  a  situs  in 
the  city  where  it  is  exercised,  and  under  the  constitutional  provision 
with  reference  to  the  assessment  of  property,  must  be  assessed  there." 

This  introduces  an  apparent  conflict  of  jurisdiction  between  the 
assessor  where  the  principal  place  of  business  is  located  and  the  assessor 
where  the  franchise  is  enjoyed. 


4'2  BEPOBT  OP  COMMISSION   UN    REVENUE   AND   TAXATION. 

In  San  Joaquin  and  Kings  River  Canal  and  Irrigation  Company  vs. 
Mt  ■'■■■'■  County,  Court  of  Appeal,  Third  District,  California,  decided 
January  2,  L906,  the  court  still  further  defines  these  points. 

1.  A  corporation's  franchise  to  be  and  act  as  a  corporation  merely 
gives  the  corporation  life  as  a  person,  which  bears  the  same  relation  to 
the  taxing  power  as  is  borne  by  natural  persons,  having  its  situs  fin-  the 
purposes  of  taxation  <>\i  v  at  the  place  where  the  corporation's  principal 
place  of  business  is  situated.     But, 

2.  The  mere  fact  that  a  corporation  is  organized  for  the  specific  pur- 
pose of  acquiring,  and  is  given  power  to  acquire,  public  uses  or  fran- 
chises, does  not  make  such  franchises  "when  acquired"  a  part  of  the 
corporation's  general  franchise  to  be  and  act  as  a  corporation.     Hence, 

3.  Where  a  corporation  was  authorized  to  acquire  property,  appro- 
priate and  distribute  water,  construct  canals,  and  establish,  collect,  and 
receive  rates,  water  rents,  etc..  and  was  authorized  to  exercise  the 
righl  of  eminent  domain,  the  actual  exercise  of  such  powers  in  a  county 
other  than  that  in  which  the  corporation's  principal  place  of  business 
was  located,  constituted  the  use  of  a  franchise  by  the  corporation  in 
such  county  and  this  franchise  IS  taxable  in  that  county. 

The  decision  refers  to  the  general  franchise  a  corporation  possesses 
by  virtue  of  having  been  granted  the  right  to  exist  in  law  as  a  natural 
person. 

The  genera]  franchise  contains  within  itself  the  power  to  acquire 
property,  and  exercise  certain  privileges,  the  execution  of  which  by 
the  corporation  tacitly  confers  upon  it  special  franchises,  which  are 
of  the  nature  of  property  appertaining  to  the  district  in  which  said 
property  or  privileges  are  exercised. 

These  privileges  are  of  the  nature  of  franchises  only  when  they 
confer  upon  the  corporation  rights  that  do  not  belong  to  the  general 
individual  or  corporation;  e.  g..  so  long  as  a  water  company  uses  its 
private  property  for  mains,  etc.,  it  has  no  franchise,  but  when  exer- 
cising the  right  of  eminent  domain,  it  uses  the  public  thoroughfares 
or  acquires  rights  through  private  property,  then  it  acquires  special 
franchises. 

c.  Equalization. 

When  the  assessment  roll  is  completed  by  the  assessor,  it  is  turned 
over  to  the  county  board  of  equalization,  which  is  composed  of  the 
county  hoard  of  supervisors  sittiie_r  as  a  hoard  of  equalization  Erom  the 
firsl  Monday  in  July  to  the  third  Monday  in  July.  The  countj  boards 
may  ''increase  or  lower"'  the  entire  assessment  roll,  or  any  assessment 
contained  therein,  so  as  to  equalize  the  assessment  of  property  and 
to  make  the  assessment  conform  to  the  true  value  of  the  property  in 
money.     Individual  taxpayers  aggrieved  by  the  action  of  the  assessor 


REPORT  OF   COMMISSION   OX   REVENUE  AND   TAXATION.  43 

have  an  appeal  to  the  county  board  of  equalization,  which  may,  on 
application  by  the  taxpayer,  reduce  his  assessment.  The  board  may 
of  its  own  initiative  raise  any  assessment  without  any  complaint  being 
made.  But  it  may  not  lower  any  assessment  save  on  complaint  in  the 
manner  set  forth  above.  When  cities  have  a  separate  assessment  roll, 
the  board  of  trustees  acts  as  a  board  of  equalization  under  powers 
similar  to  those  of  the  county  board. 

The  State  Board  of  Equalization,  composed  of  four  members,  elected 
by  districts  which  correspond  to  the  four  congressional  districts  as  they 
were  in  1879,  has  power  to  "increase  or  lower"  the  assessment  roll  of  a 
county  as  a  whole  in  order  that  the  assessment  for  the  different  counties 
shall  be  at  the  same  rate  on  the  true  value  of  the  property.  This  board 
does  not  deal  with  individual  assessments,  but  adds  to  or  deducts  from 
the  valuation  of  the  entire  assessment  valuation  of  property  in  each 
county,  as  returned  by  the  auditors,  after  equalization  by  the  county 
board,  such  percentage  as  may  be  necessary  to  bring  about  a  true 
valuation.  No  board  of  equalization,  either  State  or  county,  can  raise 
the  assessment  of  any  mortgage,  of  money,  or  of  solvent  credits  above 
their  face  value. 

It  was  originally  supposed  that  the  Constitution  gave  the  State 
Board  power  to  raise  or  lower  any  assessment  in  the  roll  of  any 
county.  But  the  courts  early  decided  that  its  powers  were  confined  to 
raising  or  lowering  the  county  roll  as  a  whole.  The  State  Board  is 
thus  shorn  of  any  real  control  over  the  assessors  and  has  practically 
only  a  very  weak  punitive  power.  It  may  punish  a  county  for  under- 
valuations by  causing  it  to  pay  a  higher  proportion  of  State  taxes. 
But  there  its  power  ends  and,  as  will  be  shown  in  another  chapter, 
the  attempt  at  equalization  itself  causes  great  inequalities. 

The  plan  proposed  by  the  Commission  will  lessen  if  not  completely 
abolish  the  evils  at  which  State  equalization  is  aimed. 

2.  The  rate. 

The  rate  of  taxation  for  State  purposes  is  determined  by  the  State 
Board  of  Equalization ;  for  county  purposes  by  the  county  board  of 
supervisors;  and  for  municipal  purposes  by  the  prop  it  municipal 
authorities.  ' 

The  State  rate  must  be  such  a  rate  as,  after  allowing  ">' ,  for 
delinquencies  and  cost  of  collection,  will  produce  8  Del  sum  equal  to 
the  amount  directed  by  the  Legislature  as  necessary  to  be  raised  by  an 
ad  valorem  tax. 

Average  tax  rates. 

The  average  total  tax  rate  levied  <>n  property  outside  of  corporate 
limits  is  $1.75  per  $!<><>  of  assessed   valuation. 


44  REPORT  OF   COMMISSION   ON    REVENUE    \M>   TAXATION. 

The  average  total  tax  rate  levied  on  property  inside  of  corporate 
limits  is  $2.55  per  $100  of  assessed  valuation.* 
The  outside  rate  is  made  up,  approximately,  as  follows: 

For    State    tux $0.50  per  $100  of  assessed  valuation. 

BV>r    county    tax O.NT>  per  $100  0f  assessed   valuation. 

I'm-  road  lax 0.40  per  $100  of  assessed  valuation. 

$1.75  per  slOO  of  assessed  valuation. 

The  inside  (city)   rate  is  made  up,  approximately,  as  follows: 

For  State  tax $0.~>0  per  $100  of  assessed  valuation. 

For    county    tax 0.85  per  $100  of  assessed  valuation. 

For  city   tax 1.20  per  $100  of  assessed  valuation. 

.s'J. .">.".   per  si i ki  of  assessed   valuation. 

These  rates  average  1.14%  of  the  full  cash  value  for  rural  property, 
and  1.5395   of  the  l'ull  cash  value  of  city  property  on  the  rolls. 

The  rates  vary  from  year  to  year  and  locality  to  locality,  but  the 
averages  for  the  State  vary  but  a  few  cents  from  year  to  year.  The 
general  tendency  is  for  them  to  increase  as  the  percentage  of  assessed 
value  to  true  value  decreases. 

The  range  in  the  total  rates  in  different  parts  of  the  State  for  cities 
is  from  $1.55  per  $100  to  $5.00  per  $100  of  assessed  valuation,  "out- 
side" from  $1.55  to  $3.00  per  $100. 

3.  Collection. 

All  taxes  for  State  and  county  purposes  are  collected  by  the  county 
tax  collectors,  except  taxes  on  personal  property  unsecured  by  real 
estate,  which  are  collected  by  the  assessor  at  the  time  of  making  up  the 
assessment    roll.     Inasmuch- as  the  rate   for  the  years  in  which  these 

taxes    are    collected    by    the    assessor    lias    not    been    determined    at    the 

time  of  this  collection,  he  is  governed  by  the  rate  the  preceding  year. 
and  after  the  rate  is  determined  the  taxpayer  is  entitled  to  a  rebate, 
or  required  to  pay  to  the  collector  the  amount  of  any  excess  thai  may 
be  due.  according  as  the  rate  for  the  new  year  is  above  or  below  that 
of  the  previous  year. 

Although  this  procedure  often  causes  considerable  annoyance  to  both 
the  taxpayers  and  assessors,  it  is  the  settled  conviction  of  the  officers 
best  qualified  to  judge  of  the  efficiency  of  the  law.  that  it  is  necessary. 
The  assessor  has  many  deputies  in  the  field,  while  the  collector  works 
mainly  in  bis  office.  If  the  tax  on  movable  personal  property  is  not 
collected  at  the  time  <>f  its  assessment  it  might  not  be  collectible  at  all. 
It  ie  only  in  the  Large  cities  that  there  seems  to  be  serious  objection  to 

*  Tliis  rate  was  given  as  $2.10  in  the  Preliminary  Report.  Returns  from  cities 
which   had  not   at   thai   time  made  report   modified  this  very  materially. 


REPORT  OF  COMMISSION  ON   REVENUE   AND   TAXATION.  45 

the  law,  this  being  on  account  of  the  annoyance  of  collecting  small 
sums  (or  refunding  such)  from  many  taxpayers.  If  the  law  is  modified 
at  all  the  modification  should  apply  only  to  the  large  cities. 

Both  State  and  county  taxes  may  be  paid  in  two  installments.  The 
first  installment  includes  all  taxes  on  personal  property  and  one  half 
the  tax  on  real  property,  and  is  payable  the  second  Monday  in  October 
and  delinquent  the  last  Monday  in  April.  The  penalties  for  delin- 
quency are  15%  added  to  the  first  installment  and  5%  to  the  second, 
and  if  the  first  installment  is  not  paid  by  the  time  the  second  becomes 
delinquent,  5%  more  is  added  thereto.  All  taxes  may  be  paid  at  the 
time  the  first  installment  is  due.  There  are  further  penalties  for  con- 
tinued delinquency. 

Taxes  on  personal  property  when  unsecured  by  real  estate  are  due 
and  payable  immediately  after  the  assessment  of  such  personal  prop- 
erty and  may  be  collected  at  once  by  distraint  and  sale.  All  taxes  are 
a  lien  upon  the  property  upon  which  they  are  levied ;  and  taxes  levied 
upon  personal  property  are  a  lien  on  any  real  property  owned  by  the 
same  taxpayer.  Real  property,  the  taxes  upon  which  have  been 
allowed  to  go  delinquent,  is  sold  to  the  State,  which  holds  the  same  for 
five  years,  subject  to  redemption,  after  which  it  may  be  sold.  Sale  is 
made  when  some  prospective  purchaser  applies  to  the  tax  collector,  and 
is  consummated  by  a  deed  issued  by  the  tax  collector  under  indorse- 
ment of  the  Controller.  During  these  five  years  and  thereafter  until 
sold  it  may  be  redeemed  by  the  owner  on  payment  of  all  taxes,  penal- 
ties, and  interest  at  7%,  accumulating  up  to  the  date  of  redemption, 
together  with  the  costs  of  advertising  the  delinquent  tax  roll  and 
certain  other  charges.  The  assessor  may  cause  the  seizure  and  sale  of 
personal  property  when  the  tax  thereon  is  unsecured  by  real- estate,  at 
any  time  after  the  assessment,  if,  in  his  opinion,  there  is  likelihood 
that  the  taxes  would  otherwise  fail  of  collection. 

Delinquent  tax  lands. 

The  provisions  in  regard  to  the  sale  of  real  property  for  delinquent 
taxes  are  not  working  well.  The  chief  difficulty  seems  to  be  that  in 
certain  parts  of  the  State  where  land  is  still  comparatively  cheap 
owners  allow  their  taxes  to  go  delinquent  but  remain  calmly  in  posses- 
sion. The  tax  with  its  penalties,  interests,  costs,  etc.,  soon  becomes  so 
large  a  lien  on  the  property  that  no  one  would  care  to  purchase  it. 
After  t\ve  years  it  is  "sold  to  the  State,"  and  as  public  property  is  no 
longer  taxable.  The  owner  has,  then  ton-,  only  to  remain  in  possession 
without  paying  any  taxes  unless  some  would-be  purchaser  applies  to 
the  tax  collector  for  a  sale.  Then,  as  the  owner  still  retains  the  privi- 
lege of  redemption,  he  ran  come  forward,  pay  the  taxes,  penalties,  etc., 
for  five   years  and  prevent  the  sale.     After  this  he  may   repeat   the 


46  REPORT  OF   COMMISSION   ON   REVENUE  AND   TAXATION. 

process  again.     The  government  may  thus  be  deprived  of  taxes  from 
smli  Lands  for  a  considerable  period  of  time. 


One  million  acres  delinquent  lands. 

The  amount  of  such  lands  Lying  delinquent  the  title  to  which  is  nom- 
inally vested  in  the  State,  is  not  less  than  one  million  acres,  or  about 
one  eighth  of  the  total  patented  ana. 

Delinquent  forestable  land. 

About  half  of  this  is  timber  land  in  the  forest  reserve.  This  has 
been  the  subject  of  a  lengthy  investigation  by  the  State  Forester,  work- 
ing in  conjunction  with  the  United  States  Forestry  Bureau.  He  reports 
that  there  are  468,580  acres,  of  delinquent  tax  land-  lying  within  the 
forest  reserves,  and  enough  more  forestable  lands  delinquent  outside 
the  forest  reserves  to  make  a  total  of  half  a  million  acres.  It  is  well 
known  that  the  United  States  Forestry  Service  would  be  willing  to 
exchange  for  the  isolated  blocks  of  land  in  the  forest  reserves  an  area 
of  the  public  lands  of  equal  value,  if  the  State  could  give  a  clear  title  to 
them.  Such  an  exchange  could  be  made  so  as  to  give  the  State  a  com- 
pact forest  reserve  of  its  own  and  vastly  enhance  the  efficiency  of  its 
forestry  administration. 

While  the  disorganization  of  the  revenue  system  of  the  State,  and 
the  loss  of  revenues  to  both  the  State  and  the  counties  arising  from  the 
delinquency  of  these  lands,  is  itself  a  serious  problem,  yet  the  paramount 
interest  of  the  State  is  in  the  preservation  of  the  forest  so  as  to  insure 
a  steady  supply  of  water  for  the  valleys.  This  is  a  matter  which  can 
be  far  more  successfully  handled  by  the  forestry  department  than  by 
this  Commission  and  reference  is  therefore  made  to  its  report. 

Delinquent  agricultural  lands. 

in  Bome  pari-  of  the  State  the  delinquency  of  agricultural  lands, 
amount  in-  roughly  to  a  half  a  million  acres,  presents  a  serious  problem. 
The  attention  of  the  Commission  lias  been  directed  to  a  number  of 
cases  in  which  very  serious  abuses  are  practiced  under  our  present 
laws.  The  following  Is  an  aggravated  but  apparently  typical  ease:  In 
one  small  valley  there  are  about  10,000  acres  of  grain  land  owned  by 
non-resident  speculators  who  have  not  paid  any  taxes  on  these  lands 
for  nine  <>r  ten  years,  and  in  the  meantime  have  collected  one  fifth  of 
the  crops  for  rent.  The  renters  and  other  residents  and  owners  have 
to  make  good  the  taxes  thus  glaringly  evaded.  This  same  land  has 
once  been  .-old  for  delinquent  irrigation  district  taxes  and  the  purchaser 


REPORT  OP   COMMISSION   ON   REVENUE  AND   TAXATION.  47 

of  that  tax  title  now  shares  the  rents  with  the  original  owners,  but 
makes  no  effort  to  remove  the  old  tax  liens. 

Possible  remedies. 

The  remedy  seems  to  be:  either  (1)  to  make  the  sale  to  the  State 
final  at  the  end  of  five  years,  refuse  redemption  after  that,  and  let  the 
State  sell  the  lands  immediately  to  the  best  possible  advantage;  or 
(2)  to  return  to  the  more  drastic  provision  for  immediate  sale  at  public 
auction  which  existed  before  1895.  In  this  connection  the  attention  of 
the  Legislature  is  respectfully  called  to  the  excellent  provisions  of  the 
Ohio  statute  for  enforced  collection  of  delinquent  taxes  on  land. 

The  taxation  of  forest  lands. 

The  equitable  taxation  of  forest  lands,  not  delinquent,  particularly  of 
those  that  have  been  cut  over,  has  had  some  consideration.  It  is 
apparent  that  a  large  part  of  the  State  is  well  suited  to  producing 
timber  trees,  but  unfit  for  any  other  valuable  purpose.  Our  forest 
wealth  is  decreasing  rapidly,  and  our  agriculture  needs  all  the  water  it 
can  get.  The  State  is  committed  to  the  policy  of  forest  protection.  If 
it  be  true  that  private  owners  of  timber  lands  would  care  for  and  culti- 
vate them  so  as  to  produce  successive  crops,  provided  they  were  encour- 
aged by  low  taxes,  a  wise  policy  would  be  to  offer  that  encouragement. 

But  your  Commission  does  not  feel  that  it  is  sufficiently  advised  about 
the  facts  and  circumstances  to  make  any  recommendation  at  this  time. 

Railroad  taxes. 

All  State  and  county  taxes  on  railroads  operated  in  more  than  one 
county  are  paid  to  the  State  Treasurer  on  order  of  the  State  Controller, 
and  that  portion  belonging  to  the  counties  is  afterwards  paid  out  to 
them  from  the  State  treasury. 


II.     POLL  TAX. 

Every  male  inhabitant  of  the  State  over  21  and  under  60  years  of 
age,  except  paupers,  insane  persons,  and  Indians  not  taxed,  must 
annually  pay  a  poll  tax  of  $2  to  the  State;  if  this  is  not  paid  between 
the  first  Monday  in  March  and  the  first  Monday  in  July  it  is  raised  to 
$3;  and  if  not  paid  before  the  last  Monday  in  December  of  the  same  year 
it  becomes  $4.  This  tax  is  collected  by  the  assessor  up  to  the  last 
Monday  in  December,  after  which  it  is  collected  by  the  tax  collector.  It 
may  be  collected  by  seizure  and  sale  of  any  property  owned  by  the 
person  from  whom  it  is  due.     It  is  a  lien  upon  the  real  estate  of  any 


18  REPORT  OF  COMMISSION    ON    REVEN1  i:    and    IWXATIon. 

person  assessed  for  a  property  tax.     The  State  receives  but  85%  of  the 
collections  of  the  poll  tax  by  the  assessor,  15%  being  retained   by  that 
officer.    The  tax  collector  receives  25%  of  all  delinquent   poll  taxes 
collected  by  him,  so  that  Buch  taxes  net  the  State  but  $3. 
The  poll  tax  yielded: 

L9Q2-3 - 1447,25]  -1 

1903  1 481,417  98 

If  wr  estimate  each  poll  tax  as  yielding  the  State  net  $1.70 — although 
in  cases  of  delinquency  each  poll  tax  yields  more  than  $1.70 — it  follows 
that  the  tax  is  paid  by  not  more  than  260,000  men  in  11)02-3,  nor  by 
over  270,000  men  in  1903-4. 

The  census  of  L900  found  468,481  men  between  the  ages  of  21  and  60 
years  in  California.  It  is  safe  to  conclude  that  the  poll  tax  is  paid  by 
only  half  of  the  persons  subject  to  it. 

County  poll  taxes. 

The  board  of  supervisors  in  any  county  may  levy  an  additional  poll 
tax  upon  each  male  person  over  21  and  under  55  years  of  age  found  in 
any  road  district.  It  is  collected  by  the  county  assessor  in  the  same 
manner  as  State  poll  taxes  are  collected.  35%  of  it  may  be  retained  in 
the  county  road  fund  and  the  remainder  distributed  to  the  road  districts 
in  which  it  is  collected. 

The  boards  of  supervisors  are  also  authorized  to  levy  a  poll  tax  for 
the  support  of  hospitals  and  poorhouses. 


III.     THE  INHERITANCE  TAX. 

Until  1905  the  inheritance  tax  was  levied  upon  collateral  inheritances 
only,  but  at  the  session  of  the  Legislature  in  that  year  a  bill  was  passed 
extending  the  inheritance  tax  to  both  direct  and  collateral  heirs. 

The  ..Id  inheritance  tax  was  at  the  rate  of  5%  upon  all  shares  of 
of  $500  or  more  passing  by  will  or  by  the  intestate  laws  of  the  State  to 
any  persons  other  than  the  father,  mother,  husband,  wife,  Lawful  issue, 
gons-  or  daughters-in-law,  or  any  adopted  child,  or  to  any  lineal 
descendant, or  lineal  ancestor.  Charitable,  benevolent,  and  educational 
ieties  were  also  exempted,  even  though  they  were  not  exempt  from 
the  genera]  property  tax. 

The  new  law  classifies  the  heirs  into  five  different  classes,  and  levies 
upon  them,  with  Liberal  exemptions  and  deductions  in  favor  of  the 
nearer  relations,  at  rates  which  vary  from  1  to  L5  .  according  to 
the  degree  of    relationship  and   the  size  of  the  inheritance  or  bequest. 


REPORT  OP   COMMISSION   ON   REVENUE  AND   TAXATION. 


49 


The  following  table,  compiled  by  the  Controller,  shows  the  classification 
of  heirs  and  the  application  of  the  rates: 


Classification    or   Indication 
of  Relationship. 


Property 

Exemption. 


Application  of  Rates  to  Value  of  Inher- 
itance or  Bequests. 


On    Excess 
After  De- 
duction of 
Exemption 
from  $25,000. 

$*2.'i,000 
to 

$50,000 

$50,000 
to 

$UM>,OIMI. 

$100,000 
to 

$.500,000. 

|        1% 

14% 

2% 

24% 

ii% 

24% 

3% 

3|% 

3% 

44% 

6% 

74% 

4% 

6% 

8% 

1.) 

5% 

74% 

10% 

124% 

In  Ex- 
cess of 


Husband,  wife,  lineal  is- 
sue, lineal  ancestor, 
adopted  or  mutually 
acknowledged  child. .. 

Brother,  sister,  or  descend- 
ant of  cither,  wife  or 
widow  of  a  son,  husband 
of  a  daughter 


Uncle,  aunt,  or  descendant 
of  either 


Widow  or  minor 
child,  $10,000. 
Others,  $4,000  .. 


$2,000 
1,500 


Grand  uncle,  grand  aunt, 
or  descendant  of  either  .. 

Other  degree  of  collateral 
consanguinity,  stranger 
in  blood,  body  politic  or 
corporate 


1,000 


500 


3% 


9% 


12% 


15% 


A  few  examples  will  show  how  this  law  is  expected  to  work.  Thus, 
for  example,  a  widow  inheriting  $25,000  from  her  husband  would  pay 
1%  on  $15,000,  or  $150.  If  she  inherited  only  $10,000,  she  would  be 
entirely  exempt.  If  she  inherited  $500,000,  she  would  pay  3%  on 
$490,000,  or  $14,700.  A  stranger  in  the  blood  inheriting  $25,000  would 
pay  5%  on  $24,500,  or  $1,225;  and  inheriting  $500,000  would  pay  nearly 
$75,000.  This  tax  is  paid  by  the  executor  or  administrator  direct  to 
the  county  treasurer  under  the  jurisdiction  of  the  superior  court  of  the 
county  in  which  probate  proceedings  are  being  taken.  The  county 
treasurers  are  allowed  rather  liberal  fees  for  the  collection  of  this  tax 
in  addition  to  their  salary  or  other  compensation  allowed  by  law. 


IV.      CORPORATION   TAXES. 

Unlike  many  states  in  the  Union,  California  has  practically  no 
special  taxes  on  corporations.  Corporations,  in  general,  are  taxed  on 
their  property  under  the  general  property  tax.  With  the  exception  of 
certain  property  of  railroads  operated  in  more  than  one  county,  as  set 
forth  above,  corporations  are  treated  exactly  as  private  individuals  are 
treated  in  the  matter  of  taxation. 

Insurance  companies. 

A  further  exception  to  this  uniform  rule  was  made  in  1903  when  every 
insurance  company  other  than  life,  not  incorporated  under  the  laws  of 
4— RT 


50  REPORT  OP   COMMISSION    ON    REVENUE   AND   TAXATION. 

California,  was  required  to  pay  annually  a  tax  of  '-!  upon  the  amount 
of  gross  premiums  received  by  it  on  business  done  in  the  state,  less 
losses  actually  paid  on  business  In  the  State,  less  premiums  returned 
on  insurance  canceled,  and  Less  premiums  paid  for  re-insurance.  In 
1905  this  tax  was  extended  to  foreign  life  insurance  companii  -  as  well, 
and  is  qow  paid  by  all  insurance  companies  except  California  insurance 
companies. 

All  foreign  insurance  companies  not  chartered  by  California  and  doing 
business  in  California  are  subject  to  the  so-called  retaliatory  law.  which 
reads  as  follows:  "When  by  the  laws  of  any  other  State  or  country,  any 
taxes,  fines,  penalties,  licenses,  fees,  deposits  of  money,  or  of  securities 
or  other  obligations  or  prohibitions,  are  imposed  on  insurance  com- 
panies of  this  State  doing  business  in  such  other  State  or  country,  or 
upon  their  agents  therein,  in  excess  of  such  taxes,  fines,  penalties, 
licenses,  fees,  deposits  of  securities,  or  other  obligations  or  prohibitions, 
Imposed  upon  insurance  companies  of  such  other  State  or  country,  so 
long  as  such  laws  continue  in  force,  the  same  obligations  and  prohibi- 
tions of  whatsoever  kind  must  be  imposed  upon  insurance  companies  of 
such  other  State  or  country  doing  business  in  this  State." 

These  taxes  on  insurance  companies  are  the  only  special  corporation 
taxes  used  in  California. 

The  charge  of  $20.00,  formerly  $10.00,  imposed  each  year  on  all 
corporations  is  a  fee,  not  a  tax,  and  will  be  discussed  below  under  that 
leading. 


V.  BUSINESS   TAXES   AND   LICENSES. 

Unlike  many  other  states,  especially  unlike  those  in  the  South,  Cali- 
fornia has  no  general  system  of  State  license  taxes  upon  different  lines 
of  business  and  occupations.  The  only  licenses  collected  for  the  State 
an-  those  collected  by  the  Fish  Commissioners,  which  amount  to  about 
$5,000  to  $6,000  a  year. 

The   county  supervisors  are.  however,  authorized   to   license   and    tax 

any  business  thai  may  Legitimately  be  carried  on  in  the  State. 

VI.  INCOME  TAX. 

The  Constitution  of  187(->  provides  for  the  levying  of  an  income  tax 
in  the  following  terms  (Art.  XIII,  Sec.  11):  "Income  taxes  may  be 
assessed  to  And  collected  from  persons,  corporations,  joint-stock  associa- 
tions, or  <■ panies  residing  or  doing  business  in  this  State,  or  any  one 

or  more  of  them,  in  such  cases  and  amounts,  and  in  such  manner,  as 
ahall  be  prescribed  by  law."*  No  taxes  bave  ever  Keen  levied  under 
this    provision.     This    is    a    mosl   valuable    provision    and    should    be 


REPORT   OF   COMMISSION   ON    REVENUE  AND   TAXATION.  51 

retained.  It  may  not  be  advisable  at  the  present  time  to  inaugurate 
an  income  tax,  although  it  may  be  so  in  the  future.  But  the  present 
practical  value  of  the  provision  is  that  none  of  the  gross  earnings  or 
other  taxes  which  may  be  thought  desirable  would,  if  held  to  be  income 
taxes,  be  unconstitutional. 


B.  SOURCES  OF  REVENUE  OTHER  THAN  TAXES. 

1.  Fees  and  analogous  charges  collected  by  State  officers. 

The  Secretary  of  State  collects  fees  for  copies  of  laws,  etc.,  for  attach- 
ing the  Great  Seal  of  the  State,  and  for  a  number  of  other  official 
services;  and  prices  for  the  sale  of  statutes,  ballot  paper,  and  the  like. 

The  most  important  items  in  the  list  of  fees  collected  by  this  officer 
are  the  fees  imposed  for  riling  articles  of  incorporation.     These  are: 

If  the  capital  stock  does  not  exceed  $25,000 $15 

If  the  capital  stock  is  over     $25,000  and  not  over     $75,000 25 

If  the  capital  stock  is  over       75,000  and  not  over     200,000 50 

If  the  capital  stock  is  over    200,000  and  not  over     500,000.- ...     75 

If  the  capital  stock  is  over     500,000  and  not  over  1,000,000 100 

If  the  capital  stock  is  over  1,000,000,  $50  for  each  additional $500,000. 

The  new  charge  of  $10  for  filing  annual  reports,  imposed  on  all  cor- 
porations by  act  of  the  Legislature  of  1905,  belongs  in  this  category. 
This  fee  was  raised  to  $20  by  the  special  session  of  1906. 

It  is  the  opinion  of  the  Commission  that  this  fee  should  be  propor- 
tional to  the  capital  of  the  different  corporations.  A  recommendation 
on  that  point  will  be  found  in  Chapter  VIII  of  Part  III  of  this  report. 

The  payment  of  this  fee  should  be  accompanied  by  the  filing  of  a 
report  showing  the  condition  of  the  corporation  each  year.  Such  a 
series  of  reports  would  form  a  valuable  public  record,  which  would  be 
of  use  for  the  necessary  executive  and  legislative  control  of  corpora- 
tions and  of  some  use  to  protect  the  public  against  the  misuse  of  the 
corporate  name,  etc. 

TV  Surveyor-General  collects  fees  for  filing  applications  for  lands:  and 
the  Register  of  the  State  Land  Office  collects  a  number  of  different  fees 
for  the  various  documents  issued  from  or  filed  in  his  office. 

The  Clerk  of  the  Supreme  Court  collects  a  number  of  different  fees 
for  the  filing  of  transcripts,  etc. 

The  Insurance  Commissioner  collects  fees  for  filing  copies  of  charters, 
annual  statements,  appointment  of  agents,  and  certifying  to  copies  of 
documents.  He  also  collects  the  taxes  provided  for  under  tin-  retaliatory 
laws  and  the  new  taxes  recently  imposed  upon  the  premiums  «>f  foreign 
insurance  companies.  These  are  reported  by  the  Controller  in  one  sum 
and,  as  the  Insurance  Commissioner  keeps  his  accounts  by  the  calendar 
year,  it  is  not  possible  to  segregate  the  items.     He  should  be  required 


52  KKl'ORT  OF  COMMISSION    ON    REVENUE    AND   TAXATION. 

to  keep  his  accounts  by  the  fiscal  year  and  to  report  his  collections 
segregated  under  the  different  classes  and  laws. 

/•  Bank  Commissioners  and  the  Building  and  Loan  Commissioners 
each  collect,  from  the  hanks  or  the  loan  associations  respectively  under 
their  supervision,  the  amount  required  to  maintain  the  commissions. 

The  collections  of  the  Fish  Commissioners  consist  mainly  of  fines 
for  infractions  of  the^game  laws  and  a  few  fees  for  the  issuance  of 
licenses. 

2.  Collections  by  State  boards  and  institutions. 

The  State  hospitals  and  a  number  of  other  State  institutions  enumer- 
ated in  the  preceding  chapter  collect  annually  a  considerable  number 
of  small  charges  which  amount  in  the  aggregate  to  a  large  sum  of 
money.  The  principal  receipts  of  this  character  are  from  "pay" 
patients  and  from  the  counties.  These  receipts  generally  pass  into  the 
contingent  funds  of  the  institutions  collecting  them  and  are  expended 
"for  such  supplies,  expenses,  buildings,  lands  and  other  property  and 
improvements  as  are  required  for  the  best  interests  of  the  hospital. " 

The  counties  are  required  to  pay  their  proper  quota  of  the  cost  of 
board  etc.,  of  persons  or  infants  maintained  in  State  schools  at  the 
State's  expense.     This  amounts  to  about  $100,000  per  annum. 

3.  Income  obtained  from  the  rental  of  State  property. 

The  most  important  item  under  this  heading  is  the  rent  of  wharves, 
etc.  on  the  water  front  in  San  Francisco,  under  the  administration  of 
the  Board  of  State  Harbor  Commissioners.  This  amounted  in  1902  3 
to  $750,229.78  and  in  1903-4  to  $900,043.92.  The  policy  of  the  State 
is.  however,  to  invest  all  the  net  income  from  this  source  in  improve- 
ments to  the  water  front.  This  is,  therefore,  not  to  be  regarded  as 
revenue  except  in  the  sense  that  it  represents  an  increased  investment 
for  the  State  in  property  capable  of  developing  a  very  large  revenue  in 
the  future  or,  in  lieu  thereof,  of  offering  great  benefits  to  commerce  and 
1  rade,  and  to  the  people  of  the  State  as  a  whole.  This  source  of  revenue 
bears  also  the  expense  of  interest  upon  moneys  invested  by  the  State 
for  the  development  of  the  water  front. 

Until  the  re-cession  of  the  Yosemite  Valley  to  the  Federal  Govern- 
ment there  w.i-  a  similar  item  of  income  from  rent-  and  privileges  there, 
amounting  in   1904  to  $6,792.09,  but  the  expense  of  maintaining  the 

valley  amounted  to  $22,306.35,  or  more  than  three  times  the  receipts. 

The  State  has  purchased  and  holds  in  trust  for  the  School  Fund  and 
for  the  University  fund,  as  well  as  for  a  few  other  small  funds,  a  large 
amount  of  bonds.  The  total  amount  of  the  bonds  so  held  was  reported 
by  the  Stat.  Treasurer  on  June  :;<>.  1904,  as  $5,388,750.00,  and  the 
interesl  received  from  this  Bource  during  the  two  years  averages  over 
lODO  per  annum.     This  is  not  all  net  revenue,  however,  as  the  State 


REPORT   OP   COMMISSION   OX   REVENUE   AND   TAXATION.  53 

holds  a. large  amount  of  its  own  bonds  in  these  funds;  a  device  which 
practically  amounts  to  the  automatic  transfer  to  the  school  and  other 
funds  of  moneys  raised  by  taxation  or  other  means.  The  interest  on 
investments  in  other  than  State  bonds  is  about  $110,000  per  annum. 

The  properties  and  investments  of  the  State  University,  although 
State  property  and  affording  a  large  revenue,  are  not  included  in  the 
Controller's  accounts,  being  treated  under  provisions  of  the  State  Con- 
stitution as  a  "private  trust." 

4.  Commercial  or  quasi-commercial  earnings. 

The  State  manufactures  jute  bags  and  crushed  rock  at  the  State 
prisons  and  school  books  at  the  State  printing  office. 

The  manufacture  of  jute  bags  is  made  with  a  capital  of  $100,000, 
known  as  the  "Jute  Revolving  Fund,"  which  must  be  maintained  from 
the  receipts  of  sales.  The  manufacture  of  crushed  rock  is  carried  on 
with  a  capital  of  $5,000  in  a  similar  "  revolving  fund."  The  net  profits 
are  turned  into  the  prison  funds. 

The  receipts  from  the  sale  of  State  school  text-books  have  not  been 
analyzed,  but  it  is  not  probable  that  they  are  in  excess  of  the  cost  of 
manufacture.  All  these  receipts  are  in  the  nature  of  a  revolving  fund 
and  are  reinvested  in  the  production  of  school  books. 

5.  Income  from  the  sale  of  State  lands. 

The  United  States  Government  granted  to  the  State  for  the  support 
of  schools  the  sixteenth  and  thirty-sixth  sections  in  every  township  of 
public  lands,  or  equal  amounts  of  land  in  lieu  thereof;  also  500,000 
acres  of  other  land  within  the  State.  These  school  lands,  as  they  are 
called,  are  to  be  sold  at  the  rate  of  $1.25  an  acre,  payable  in  install- 
ments, with  interest  upon  the  unpaid  portion  at  the  rate  of  7%.  The 
principal  received  from  the  sale  of  these  lands  is  carried  into  what  is 
known  as  the  State  School  Land  Fund  and  invested  in  bonds  of  the  State, 
the  counties,  or  the  municipalities  within  the  State.  The  interest  on 
these  investments,  as  above  described,  is  paid  to  the  State  School  Fund. 
The  State  also  receives  interest  from  purchasers  on  the  unpaid  portion 
of  the  purchase  price,  which  amounted  in  the  fifty-fifth  fiscal  year  to 
$37,368.50,  and  this  is  credited  to  the  School  Fund. 

In  a  manner  similar  to  the  School  Fund,  the  consolidated  perpetual 
endowment  fund  of  the  University  of  California  is  made  up  of  moneys 
received  from  150,000  acres  of  land  granted  to  the  State  for  the  use  of 
an  agricultural  college. 

6.  Income  from  "gifts,"  "escheats,"  etc. 

The  balance  of  the  State  revenues  obtained  from  gifts,  escheats, 
"money  returned,"  and  the  sale  of  old  materials  is  composed  of  self- 
explanatory  items. 


54  KKPORT   OF   CUM  MISSION    ON    KI.YI  Ml      \NI>    TAXATION. 


CHAPTER    III. 

INEQUALITIES  IN  TME  EXISTING  SYSTEM  OE  TAXATION. 


The  increase  in  the  tax  burden. 

It  is  generally  admitted  that  our  present  system  of  taxation  is  full 
of  inequalities.  These  inequalities  are  accentuated  and  rendered  more 
Berious  year  by  year  by  the  general  increase  in  the  burden  upon  the 
revenue  system.  The  people  continually  demand  more  and  more  of 
the  various  branches  of  the  governmenl  and  the  burden  upon  the 
property  holders  increases  at  a  very  rapid  rate.  In  I860  the  amount 
collected  by  the  State  alone  from  the  general  property  tax  was  $889,- 
162.  It  is  now  over  $8,000,000  annually— an  increase  of  9.2  fold.  The 
burden  placed  upon  property  by  the  counties,  cities,  school  districts, 
and  the  Like,  is  very  nearly  three  times  as  much  again,  or  in  all  some- 
thin-  over  $32,000,000  per  annum.  The  growth  in  the  burden  of  taxa- 
tion has  been  much  more  rapid  than  the  growth  in  population  during 
the  -a me  period;  that  is.  from  1860  to  the  present,  the  population  has 
increased  from  380,000  to  1,625,000,  or  4.3  fold.  In  other  words,  the 
burden  of  taxation  is  increasing  more  than  twice  as  rapidly  as  the 
population.  In  1860  the  taxes  paid  by  the  people  for  State  purposes 
alone  amounted  to  about  $2.35  per  capita,  and  they  are  now  over  $5 
per  capita.  The  total  amount  of  taxes  raised  by  the  ad  valorem  tax 
on  property  is  about  $20  for  every  man,  woman  and  child  in  the  cities, 
ami  $17  for  .very  man,  woman  ami  child  in  the  country  outside  of  the 
cities.  In  consequence  of  this  rapid  increase  in  the  burden  of  taxation 
every  one  of  the  inequalities  of  the  system  is  accentuated  more  and 
more  each  yea  r. 

An  antiquated  system. 

Tie-  presenl   tax   system  of    California   is   antiquated.     It    was  two 

hundred  year-  old  when  first  adopted  in  this  State,  and  has  not  ben 
■  ntially  modified  during  the  fifty  years  that  we  have  used  it. 
Meanwhile  the  Stale  has  outgrown  the  simple  conditions  of  economic 
life  to  which  alone  the  system  was  adapted,  and  in  capital  and  wealth, 
in  industrial  and  commercial  methods,  is  now  like  those  gr%at  states  on 
the  Atlantic  which  have  found  it   necessary  to    revise   their   tax  systems 

to  meel  the  conditions  of  modern  life.     The   burden  of  the  support  of 

the  governmenl   fall.-  most   unequally  upon  those  who  should  bear  it. 

It    falls   with  special   severity   upon  the  poor  and    with   the   greatest 

,.,-ity  upon  the  honest.     The  present  system  of  taxation   is  highly 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  55 

conducive  to  political  immorality  and  is  a  veritable  school  for  perjury. 
It  fails  altogether  to  reach  the  new  forms  of  property  which  have 
developed  during  the  past  fifty  years,  or  to  reach  the  new  kinds  of 
ability  that  should  contribute  to  the  public  needs.  Personal  property 
notoriously  escapes  taxation,  and  about  85%  of  the  entire  burden  of 
maintaining  government  is  borne  by  the  owners  of  real  estate  alone. 
Our  best  efforts  at  equalization  fail  utterly  of  accomplishing  what  they 
are  intended  to  accomplish,  and  that  on  account  of  difficulties  inherent 
in  the  system. 

A.      FAILURE  TO   REACH   PERSONAL   PROPERTY. 

The  Constitution  requires  that  all  property  shall  be  taxed  in  propor- 
tion to  its  value.  This  is  not  done,  and  is  in  fact  an  impossibility.  The 
greatest  inequality  in  the  operation  of  our  revenue  system  arises  from 
the  fact  that  personal  property  escapes  taxation  almost  entirely.  At 
the  present  time,  including  money  and  solvent  credits,  personal  prop- 
erty constitutes  only  18%  of  the  entire  tax  roll.  In  1860  personal 
property  constituted  46%  of  the  entire  tax  roll,  in  1870  it  was  39%,  in 
1880,  26%.  The  total  amount  of  personal  property  assessed  in  1897  was 
less  by  $67,711,000,  or  38%,  than  the  amount  assessed  in  1872;  in  fact, 
the  assessment  of  personal  property  made  in  1872 — $220,000,000 — 
was  the  highest  on  record  until  1903.  Meanwhile  the  entire  roll  had 
increased  over  threefold.  In  1880  the  assessed  value  of  personal  prop- 
erty was  $174,000,000,  and  in  1904  $282,000,000,  while  the  total  assess- 
ment roll  increased  in  the  same  period  from  $666,000,000  to  very  nearly 
$1,600,000,000.  Omitting  the  item  of  money  and  solvent  credits,  and  the 
valuation  of  railroad  property,  which  is  made  by  the  State  Board  of 
Equalization,  we  find  that  at  the  present  time  only  between  10%  ami 
15  ,  of  the  entire  tax  roll  is  made  up  of  personal  property  found  by 
the  assessors.  It  is  utterly  inconceivable  that  the  assessment  in  this 
respect  reflects  the  actual  conditions.  During  the  period  since  1880 
the  number  of  acres  of  land  assessed  has  increased  over  60%,  and 
although  there  is  no  necessary  connection  between  the  number  of  acres 
under  cultivation  and  the  amount  of  personal  property  in  the  State, 
yet  it  is  not  conceivable  that  a  people  who  own  more  than  half  again 
a-  much  land  as  they  did  in  1880,  own  only  about  35%  more  personal 
property.  The  amount  of  personal  property  musl  stand  in  some  sort 
of  relation  to  the  number  of  people.  It  is  certainly  natural  to  suppose 
that  the  1,625,000  people  now  ill  the  State  would  own  at  least  twice  as 
much  personal  property  as  the  860,000  people  who  lived  here  in  1880, 
probably  as  much  more  as  we  are  wealthier  than  of  yore,  yet,  accord- 
ing t<>  tie-  assessment  roll,  the  800,000  people  who  have  come  into  the 
State  since  1880  have  brought  with  them  per  capita  only  one  third  as 
much  personal  property  as  the  860,000  had  wlm  were  here  in  1880.     In 


56  REPORT  OF   COMMISSION    ON    REVENUE   AND   TAXATION. 

1880  the  per  *;i  ]  >it  :i  assessment  of  personal  property  was  $201.  In  1S«»0 
it  was  only  $139j  in  1896,  $122:  and  at  the  present  time  barely  $150. 
During  the  same  time  the  per  capita  assessment  of  real  estate  increased 
from  $523  to  about  $840  per  capita.  Such  glaring  absurdities  are 
revealed  by  a  study  of  the  mere  totals  of  the  assessment  roll-. 

The  reasons  for  this  are  found  in  the  nature  of  the  different  classes 
of  property  which  escape.  They  are  for  the  most  part  things  which  it 
is  easy  to  conceal. 

The  assessment  of  money  and  solvent  credits. 

In  connection  with  the  discussion  of  the  taxation  of  banks,  in  another 
chapter  of  this  report,  some  of  the  inequalities  in  the  operation  of  our 
revenue  laws  are  carefully  discussed  and  commented  upon.  Among 
them  is  the  unfortunate  fact  that  national  banks  can  not  be  taxed  at  all 
under  our  present  system;  that  aside  from  this  the  banks  were  some- 
what under-taxed,  and  that  almost  all  the  money  on  deposit  in  hanks. 
which  is  taxable  to  the  depositors,  escapes  taxation.  At  hast 
$300,000,000  of  such  taxable  property  is  never  placed  on  the  tax  rolls. 
In  fact,  it  is  certain  that  not  more  than  20%  of  the  taxable  amount  of 
money  and  solvent  credits  has  ever  found  its  way  into  the  assessment 
rolls.  It  is  an  open  question  whether  it  is  proper  to  tax  money  and 
credits  at  all.  Certain  it  is  that  the  experience  of  the  State  since  the 
beginning  has  demonstrated  that  no  matter  what  the  law  requires  it  is 
practically  impossible  to  tax  this  class  of  property  directly  and  as  such. 
The  following  table  Bhows  the  assessment  of  money  and  solvent  credits 
for  a  number  of  years: 

Assessment  of  Money  and  of  Solvent  Credits. 
year  TotalBtate     Ban  Francisco. 

L872.. - - $111,531,623  $79,106 

1873 11,487,808* t 

*  *  *  * 

1876 16,904,218*  14,212,95 

1877.. 13,403,606*  11,013,095* 

L878.. 11,881,997*  9,133,280* 

187 9,866,986*  7,388,635* 

1880 24,678,830         t 

1881 - --- - 13,597,566*  9,831,992* 

L882 .- 20,694,328  8,621,200 

_  26,850,161  14,710,393 

L884 - 26,303,958  15,269, 

1885 —  10,483,087*  6,657,298* 

*  Money  (inly.  In  BOme  cast  -  the  reports  do  not  segregate  solvent  credits  from  other 
personal  property.  No  segregation  of  cither  money  or  solvent  credits  was  made  In  the 
reports  before  L872,  except  In  L861,  when  the  amount  of  money  assessed  was  given  as 
$1,642,663.     The  report  oi  the  state  Board  <>f  Equalization  for  1874-75  was  not  printed. 

i  Money  and  solvent  credits  are  not  separated  from  other  personal  property.  But  the 
report  of  the  Stat.-  Board  Of  Equalization  for  1872  and  is::;  contains  a  statement  in 
regard  to  seventeen  savings  hanks,  showing  a  reduction  in  their  assessment  from  over 
$30,000,000  in  1872  to  less  than  $2,000,000  in  is:::. 


REPORT   OF    COMMISSION   ON    REVENL'K   AND    TAXATION.  ol 

Assessment  of  Money  and  of  Solvent  Credits.    -Continued. 

Year.  Total  State.    Bain  Francisco. 

1880 --- 22,078,318  13,307,475 

1887 - 20,140,212  15,672,424 

1888 - 28,600,278  10,313,776 

1889 ---  27,505,543  10,885,983 

1890 25,226,970  17,385,536 

1891 25,983,913  17,300,084 

1892 - ---  25,877,180  17,112,858 

1893 - - 26,811,003  16,950,134 

1894 - 22,622,525  15,383,929 

1895 - 20,270,813  17,122,486 

1890 —  45,623,195  35,178,734 

*                       *                       *  * 

1903 --- 42,894,994    33,599,059 

1904 ---- 42,921,033    33,648,682 

There  are  two  things  particularly  notable  in  this  table.  The  first  is 
the  absence  of  any  steady  increase  such  as  we  might  expect  to  find  if 
the  assessment  had  kept  pace  with  the  actual  growth  of  the  State. 
The  second  is  the  sudden  jump  in  1896,  which  was  due  to  the  fact  that 
the  Bank  Commissioners  were  induced  to  require  a  report  on  the  con- 
dition of  the  banks  on  the  first  Monday  in  March.  This  report  was 
used  by  the  assessors  to  check  the  returns  of  the  banks.  This  practice 
has  since  been  discontinued,  but  it  resulted  in  an  increase  of  74%  of  the 
assessment  of  money  and  solvent  credits  in  a  single  year.  In  San 
Francisco  the  increase  was  even  more  marked,  being  over  100%.  Most 
of  the  money  and  solvent  credits  on  our  tax  rolls  is  assessed  against  the 
banks.  It  is  extremely  rare  that  any  private  individual  is  assessed  for 
property  of  this  class.  Only  in  the  case  of  an  estate  in  probate  or  of 
money  in  the  hands  of  trustees  who  are  afraid  to  prejudice  the  interests 
of  their  dependents  by  any  attempt  to  evade  the  law  is  there  any  regular 
assessment  of  such  property.  This  of  itself  works  a  special  hardship, 
for  the  tax  is  evaded  by  the  strong  and  shrewd  and  borne  by  the  weak 
and  honest.  The  decrease  since  1896  is  the  measure  of  the  skill  acquired 
since  then  in  concealing  this  class  of  property  from  the  assessor. 

The  assessment  of  other  forms  of  personal  property. 

Turning  now  to  other  forms  of  personal  property,  we  find  considerable 
difficulty  in  attempting  to  ascertain  the  exact  amount  which  escapes 
taxation,  although  we  have  ample  evidence  that  a  large  part  does  escape. 
One  of  the  classes  of  property  which  largely  escapes  taxation  is  "  goods, 
wares  and  merchandise."  In  1890  the  State  Board  of  Equalization  said 
of  this  item:  "Certainly  the  supply  should  keep  pace  with  the  increase 
of  population.  Since  1880  the  population  has  increased  46%,  while  the 
increase  in  the  valuation  of  goods  and  merchandise  in  1890  over  that 
of  1880  is  27%  and  over  that  of  1883  only  6.06%." 


58  REPORT   OF    COMMISSION    ON    REVEN1   E    \\1>   TAXATION. 

Assessment  of  Merchandise. 

1880    $27,650,184 

L882        28,903,860 

18K3 32,954,572 

1884 34,449,166 

L886    30,755,48 

L887   32,722,933 

L888 ---  34,803,462 

L889 - --■ 35,620,993 

L890 35,149,996 

*  #  *  * 

L896 - 4ii.435.493 

This  item  includes  the  stock  of  goods  in  the  hands  of  merchants.  It 
i-  doI  customary  and  probably  not  feasible  to  demand  an  inventory. 
A.8  the  assessor  can  not  visit  every  store  in  his  county  on  the  first 
Monday  in  March,  his  only  source  of  knowledge  is  the  sworn  "state- 
ment" of  the  owner,  which  is  usually  made  some  time  later  than  the 
first  of  .March,  to  which  date  it  refers.  To  be  sure,  the  law  forbids  the 
assessment  of  the  property  of  any  person  "in  gross,"  but  whether  it 
requires  a  detailed  enumeration  of  all  the  things  in  an  assorted  stock 
of  goods  is  doubtful.  Still,  the  underassessment  in  this  case  is  not  so 
great  as  in  other  cases. 

An  interesting  bit  of  evidence  as  to  the  general  underassessment  of 
personal  property,  especially  of  such  items  as  goods,  wares  and  mer- 
chandise, house  furnishings,  libraries,  and  the  like,  is  to  be  found  in  the 
reports  of  the  Underwriters'  Fire  Patrol  in  San  Francisco.  The  total 
losses  by  lire  in  San  Francisco  from  1884  to  1896,  inclusive,  amounted 
to  $13,140,264,  of  which  .$3,790,904  was  on  buildings,  and  .$9,349,360  on 
their  contents.  That  is,  the  loss  on  the  contents  was  2.48  times  as  great 
as  on  the  buildings.  It  is  probable  that  the  salvage  on  the  buildings 
was  greater  in  proportion  to  their  value  than  on  the  contents,  and  it 
i-  also  probable  that  the  content-  were  more  or  less  damaged  by  the 
water  and  smoke.  But  even  making  allowance  for  all  of  this,  we  should 
expect  to  find  the  assessment  of  the  contents  of  buildings,  so  far  as 
this  evidence  goes,  especially  of  mercantile  buildings,  crammed  to  the 
full  with  valuable  wares,  at  least  as  high  as  that  of  the  buildings  them- 
1  >\it  the  assessment  of  the  contents  of  buildings  is  only  about  50% 
of  the  assessment  on  the  buildings  themselves. 

The  assessment  of  franchises. 

An  item  which  is  mosl  irregularly  assessed  is  franchises.  The 
amount  of  franchises  assessed  ID  1896  «:i-  $10,415,830.  In  1894  it  was 
$39,786,348,  of  which  amount  nearly  $29,000,000  was  in  San  Francisco, 
•$."..01  h  i.OOO  in  Alameda  County,  and  $  I  si  ).<)()()  in  Los  Angeles,  a  total  for 
the  three  greal  city  counties  of  $:'.s,!i:;i,000, leaving  Lese  than  $1,000,000 


KbIPORT   OP   COMMISSION   ON   REVEXIE   AND   TAXATION.  59 

for  the  entire  State  outside  of  these  cities.  This  anomalous  distribu- 
tion is  due  in  part  to  the  assessment  of  franchises  at  the  place  where 
the  head  office  of  the  corporation  is  located,  a  practice  which  is  modified 
under  the  recent  decisions  of  the  court  in  regard  to  the  assessment  of 
franchises  that  lias  been  commented  upon  in  another  connection.  Nine- 
teen out  of  fifty-seven  counties  report  no  franchises  at  all  subject  to 
assessment,  and  seven  others  none  worth  over  $1,000.  Most  of  these 
counties  are,  of  course,  without  corporations  enjoying  valuable  fran- 
chises, but  many  of  them  doubtless  have  franchises  which  are  not 
assessed.  The  whole  question  of  the  taxation  of  franchises  is  discussed 
in  another  connection.  It  is  obvious  that  the  assessors  as  a  rule  are 
unable  to  handle  this  class  of  property  and  that  taxes  intended  to 
reach  these  intangible  values  should  be  levied  in  some  other  manner 
than  directly  upon  the  property. 

Miscellaneous  items. 

The  law  requires  the  assessors  to  make  a  return  to  the  State  Board 
of  Equalization  of  each  of  the  different  classes  of  property  assessed 
by  them.  This  return  is  purely  for  statistical  purposes  and  is  regarded 
by  most  of  the  assessors  as  an  imposition  and  as  something  falling 
without  their  proper  sphere  of  activity.  To  make  such  a  statistical 
return  accurately  would  require  an  immense  amount  of  labor  and  is 
tar  beyond  the  capacity  of  most  of  the  assessors'  offices.  It  is  therefore 
made  up,  as  a  rule,  in  a  most  perfunctory  manner  and  is  published  each 
year  by  the  State  Board  of  Equalization  in  elaborate  tables  which  are 
of  very  little  practical  value.  It  is  a  task  of  which  the  assessors  might 
well  he  relieved.  If  these  figures  can  be  regarded  as  of  any  value  ;it 
all  they  show  a  number  of  glaring  absurdities.  For  example:  the 
value  of  furniture  returned  is  only  $21,726,000,  which  is  only  $13  apiece 
for  each  man,  woman,  and  child  in  the  State;  barely  enough  to  buy 
a  bed  and  bedding.  In  one  year  there  were  only  6,753  watches 
reported  in  this  State,  or  about  one  for  every  23  persons.  In  1904  the 
-sment  of  watches  was  .^789,000,  which,  allowing  $10  apiece,  would 
represent  only  78,000  watches.  Much  of  the  grain  crop  of  the  Slate 
is  not  reported,  being  shipped  before  the  assessmenl  day  and  growing 
crops  are  exempt.  In  1896,  however,  there  were  20,294,428  centals  of 
wheat  in  the  State,  assessed  at  $2,662,428,  or  aboul  12%  cents  per 
cental.  In  1895,  7,850,890  centals  were  assessed  at  $4,886,153,  or  aboul 
56  cents  per  cental.  The  actual  price  in  1896  was  higher  than  in  1895; 
just  the  reverse  of  the  nature  of  the  assessment.  It  is  unnecessary  t<> 
make  a  further  enumeration  of  the  details  in  which  the  assessmenl  of 
personal  property  is  defective.    These  defects  are  known  to  every  tax- 


60  REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 

payer;  there  is  scarcely  a  man  with  whom  one  discusses  the  subject  of 
taxation  in  this  State  who  '-an  not  cite  instances  of  glaring  inequalities 
that   have  come  to  his  particular  notice. 


B.     INEQUALITIES  IN  THE  ASSESSMENT  OF  REAL  ESTATE. 

Real  estate  is  practically  all  on  the  assessment  rolls.  In  this  respect 
it  differs  sharply  from  personal  property,  of  which  only  a  small  pro- 
portion goes  on  the  rolls.  It  is  on  this  account  that  our  ad  valorem 
General  Property  Tax  has  come  to  be  practically  a  tax  on  real  estate 
only.  There  are,  however,  inequalities  of  four  different  kinds  in  the 
assessment  of  real  estate.  First:  There  are  inequalities  between  the 
different  counties  and  between  the  different  cities  and  towns  within 
the  .same  county,  arising  from  the  administration  of  the  tax  system  by 
different  authorities  and  the  general  failure  of  the  scheme  of  equaliza- 
tion. Sicond:  There  are  inequalities  between  rural  and  city  property 
which  arise  in  some  cases  from  the  fact  that  the  tax  rate  in  cities  is 
fixed  and  that  in  order  to  raise  more  money  for  city  purposes  the 
assessment  must  be  raised,  thus  throwing  an  undue  proportion  of  the 
State  and  county  taxes  upon  the  locality  thus  discriminated  against. 
Third:  Inequalities  in  the  assessment  between  the  land  and  the  im- 
provements thereon;  and,  Fourth:  Inequalities  between  individuals 
in  the  same  locality. 

Inequalities  between  different  localities. 

In  spite  of  the  activities  of  the  State  Board  of  Equalization  there 
are  undoubtedly  great  differences  in  respect  to  the  assessment  of  real 
estate  between  the  different  cities  and  the  different  counties.  The  law 
requires  the  taxation  of  property  at  its  "full  cash  value,"  hut  the  law 
in  that  respect  is  rarely  complied  with.  Many  of  the  assessors  frankly 
admit  that  they  take  anywhere  from  50$  to  65%  or  70%  of  the  true 
value  as  the  basis  of  their  assessment.  This  Commission  has  not  thought 
it  necessary  to  make  an  investigation  of  the  extent  of  these  inequalities, 
inasmuch  as  the  plan  which  the  Commission  has  to  propose  will  do 
away  with  the  incentive  for  undervaluation  and  remove  all  inequality 
in  taxation  arising  from  differences  in  the  assessed  valuation  of  the 
different  cities  and  counties.  We  publish  without  comment  a  table 
compiled  from  the  report  of  the  eleventh  census  of  the  United  Slates 
on  "Wealth.  Debt,  and  Taxation."  which  shows  some  of  the  probable 
inequalities  which  existed  in  some  of  the  different  cities  some  fifteen 
years  ago: 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  61 

True  Value  Compared  with  the  Assessed  Value  of  Real  Estate  In  Nineteen  Cities. 

True  lasesMd       Per  Cent  of 

Cities  Valuation  of  \r0i,',„         Assessed  to 

Real  Estate.  value.       True  Value. 

Alameda - $10,531,388  $7,471,853  70 

Berkeley - - 5,413,660  3,608,840  66 

Eureka".-- - - 2,500,000.  2,393,103  95 

Fresno ... -- 10,000,000  6,436,r.4  64 

Los  Angeles 67,589,870  45,066,436  66 

Napa.. - 2,947,930  1,787,650  60 

Oakland - 70,000,000  35,827,273  51 

Pasadena- - — -  9,000,000  4,2:»4,167  47 

Riverside  - --  15,000,000  3,987,685  26 

Sacramento - -■  28,000,000  13,064,571  46 

San  Bernardino 7,441,404  3,720,702  50 

San  Diego - - 44,500,000  14,678,101  33 

San  Francisco 316,830,419  235,355,668  74 

San  Jose- 30,000,000  14,826,447  50 

SantaBarbara - --- -  4,894,833  2,894,833  59 

Santa  Cruz... -.-- 10,300,000  3,003,285  30 

Santa  Rosa —  4,645,835  3,071,173  66 

Stockton —  12,283,162  8,122,108  66 

Vallejo - --- 1,700,000  1,250,000  73 

Under  the  existing  system  of  taxation  these  inequalities  are  a  matter 
of  serious  concern,  for  they  enable  some  of  the  counties  to  roll  off  upon 
the  shoulders  of  their  neighbors  a  very  considerable  part  of  the  burden 
of  State  taxation  which  they  themselves  should  bear.  When  the  differ- 
ences lie  between  different  portions  of  the  same  county  they  enable  one 
city  to  roll  off  a  part  of  its  fair  share  of  the  county  taxes  upon  its 
neighboring  cities. 

If  one  county  has  property  worth  $20,000,000  assessed  at  $10,000,000, 
when  another  county  has  $30,000,000  assessed  at  $20,000,000,  and  the 
State  tax  rate  is  50  cents  on  the  $100  of  assessed  valuation,  the  first 
county  swindles  the  second  out  of  $10,000.  That  is,  if  both  had  been 
assessed  at  the  same  ratio,  say  three  fifths  of  their  true  value,  the  first 
would  have  paid  to  the  State  50  cents  on  $12,000,000,  or  $60,000  instead 
of  $50,000,  and  the  second  would  have  paid  50  cents  on  $18,000,000,  or 
$90,000  instead  of  $100,000. 

If  these  were  two  cities  in  the  same  county  with  a  State  and  county 
rate  of  $1.50  per  $100,  the  robbery  would  have  been  three  times  as 
large,  or  $30,000. 

Every  assessor  feels  himself  under  pressure  to  protect  his  own  con- 
stituents against  this  sort  of  over-taxation  by  keeping  his  assessments 
at  least  as  low  as  those  of  his  neighbors.  If  he  resists  this  pressure  he 
is  likely  to  find  himself  swept  out  of  office. 

Equalization  fails  to  equalize. 

The  supervisors  are  supposed  to  equalize  between  individuals  and  to 
correct  the  rolls.     To  <!•»  this  thoroughly  would  require  an  inspection  of 


I 


62  REPORT  OF   COMMISSION   ON    REVEN1  i:   AM'  TAXATION. 

every  piece  of  property  on  the  rolls — an  absolutely  impossible  task. 
Hence,  tiny  are  compelled  to  content  themselves  with  the  adjudication 
of  complaints  by  aggrieved  taxpayers.  Their  action  tends  in  general  to 
reduce  the  roll  of  the  county  and  to  intensify  the  inequality  between  it 
and  other  counties. 

The  State  Hoard  of  Equalization  is  required  to  equalize  between 
counties.  Bu1  it  ran  not  change  the  assessment  of  any  individual  nor 
of  any  class  of  property.  Hence,  its  action  must  be  and  can  be  solely 
punitive.  Practically  it  imposes  a  fine  on  the  county  by  raising  it- 
entire  roll  5,  10,  20,  or  30  per  cent,  or  discredits  tbe  assessor  by  reduc- 
ing his  valuation.  A  reduction  is  a  distinct  hint  to  the  assessor's  con- 
stituents that  that  officer  has  been  too  zealous.  Whether  the  board 
raises  or  lowers  the  roll,  it  simply  intensifies  the  difference-  already 
existing  within  the  county  itself. 

The  following  table,  computed  with  simple  figures  for  a  hypothetical 
county,  shows  how  grievously  existing  inequalities  are  intensified  by 
equalization: 

Effect  of  Unequal  Valuation  on  a  Hypothetical  County  Composed  of  Three  Towns,  one 

Assessed  at  75    ,  one  at  50,  and  one  at  66    .     Also  Effect  of  an  Increase  of  20% 

by  the  State  Board. 

Town  A.  Town  B.  Town  C  (totals. 

True- value $40,000,000        $130,000,000          $30,000,000  $2hu.ihr).ooo 

Value  fixed  by  assessor 30,000,000          65,000,000          20,000,000  115.000,000 

Btate'taxtobepaidat50cents..         150,000               325,000               100,000  575,000 

Btate  tax  should  have  been 1.15,000               373,750                86,250  .000 

Differences.... —  :■■■"•. '  »,750t  13,750* 

Town  B  robs  A  of  $35,000  and  C  of  $13,750,  a  gain  of  $48,750. 

Equalized  value ...$.30,000,000  >7s,000,000  $24,000,000        $138,000,000 

e  taxes  were  at  50  cents  ....         L80.000  390,000  12<ukh>  ikh).ikk> 

State  taxes  should  have  been...        138,000  us, 500  in:;.:>nn  imm.oou 

Differences    —  12,000*  58,800t  L6.50 

Town  B  now  robs  A  of  $42,000  and  C  of  $16,500,  and  gains  $58,500. 

Cause  of  these  inequalities. 

The  inequalities  between  the  different  counties  arise  for  the  most 
part  from  the  fact  that  the  State  tax  is  imposed  upon  the  Bame  valua- 
tion to  which  the  county  and  local  taxes  are  applied.  It  forms  what 
the  Spanish  call  a  "sur-tax,"  a  tax  added  to  a  tax  already  established. 
This  has  been  so  clearly  recognized  that  some  reformers  actually  advo- 
cate fixing  the  rate  for  State  purposes  in  the  regular  Spanish  method  as 
a  percentage  upon  the  taxes  already  imposed  for  local  purposes. 

If  then-  were  no  State  tax  to   be  apportioned  among  the  counties,  on 

the  basie  of  the  Local  assessed  valuation,  there  would  be  no  object  or 
inducement  to  the  assessor  or  to  the  citizens  of  the  county  to  obtain  a 

low  valuation.  In  fact,  there  would  be  more  inducements  to  the 
assessor  to  a—ess  the  property  as  marly  as  possible  at  its  full  market 

Too  much.       1  Too  little. 


REPORT   OP    COMMISSION   ON   REVENUE    AND    TAXATION.  63 

value  in  order  to  avoid  inequalities  between  the  citizens  among  his  own 
constituents,  and  to  protect  himself  against  the  charge  of  favoritism. 
The  probability  is,  that  in  order  to  enjoy  the  advertising  effect  of  a  low 
tax  rate  the  general  inclination  would  be  for  the  assessor  to  raise  the  valua- 
tion rather  than  reduce  it.  A  high, tax  rate  is  a  bad  advertisement  for 
a  city  or  a  county,  and  if  there  is  no  State  tax  to  be  imposed  on  the 
same  valuation,  the  county  could  have  the  advantage  of  the  low  rate  by 
the  simple  process  of  raising  the  assessed  valuation  from  its  present 
level  of  about  50%  or  60%  to  its  full  value. 

Inequalities  between  rural  and  urban  property. 

The  inequalities  between  the  assessment  of  rural  and  urban  property 
are  difficult  to  determine  and  to  measure.  They  vary  greatly  in  the 
different  counties.  In  certain  portions  of  the  State,  the  city  assessments 
are  relatively  higher  than  are  those*in  the  rural  districts,  and  in  other 
parts  the  reverse  is  the  case.  But  on  the  average  there  can  be  little 
doubt  that  the  rural  districts  are  overtaxed,  and  there  seems  to  be  good 
ground  for  the  contention  of  the  farmers,  so  often  put  forward  in  the 
reports  of  the  State  Grange,  that  the  farmers  are  overtaxed  under  the 
present  system,  and  furthermore  that  part  of  this  overtaxation  is  due 
to  the  overassessment  of  lands.  The  best  way,  however,  to  test  the 
relative  inequality  in  our  tax  system  between  the  city  and  the  country 
is  not  to  undertake  to  ascertain  the  true  market  value  of  the  property 
and  compare  that  with  the  assessed  value,  but  to  ascertain  the  taxes 
paid  and  to  compare  them  with  the  income  yielded  by  the  farm  or  by 
the  city  real  estate.  The  taxes  paid  and  the  income  yielded  can  be 
ascertained  with  a  high  degree  of  accuracy.  The  values  would  be  in 
any  event  a  matter  of  opinion. 

Fortunately  the  United  States  census  in  1900  undertook  the  enormous 
task— a  task  which  would  have  been  far  beyond  the  means  and  ability 
of  this  Commission — of  ascertaining  the  total  value  of  all  farm  property, 
the  total  value  of  all  farm  products,  and  other  items  which  will  enable 
us  to  obtain  a  very  close  approximation  of  the  net  income  from  ami- 
culture  in  this  State.  The  total  value  of  all  farm  property  was  reported 
as  $796,527,955,  which  was  subdivided  as  follows: 

Land  and  improvements  not  buildings $630,444,960  or    79% 

Buildings    77,4GS,000  or  9.7 

Implements    21,311,670  or  2.7% 

Live   stock 67,303,325  or  8.5% 

The  total  value  of  all  farm  products  in  that  year  was  $131,690,606, 
which  was  16.5 %  of  the  value  of  the  farms.  The  value  of  all  the  farm 
products  not  fed  to  live  stock  was  $118,202,036,  or  14.8%  of  the  value 
of  the  farms.  Labor  was  paid  $25,845,120  and  fertilizers  cost  $937,050, 
a  total  of  $26,872,170,  leaving  a  net  product  of  $91,491,866,  which  is 


64  REPORT  OF  commission    ON    REVENUE   AND  TAXATION. 

11.5%  of  the  value  of  the  farms.  This  total,  however,  includes  the 
farmer's  own  compensation  for  his  own  labor  and  for  the  labor  of  the 
members  of  his  own  family.  Out  of  this,  also,  the  farmer  must  pay 
taxes,  insurance,  repairs  and  other  expenses.  In  short,  it  includes  not 
only  the  return  on  the  investment,  but  also  a  certain  amount  of  reward 
of  labor  other  than  that  actually  paid  to  hired  laborers,  and  considerable 
<>xpcns<\  The  census  did  no1  reporl  the  taxes  paid  by  farmers  sepa- 
rately from  the  other  expenses,  but  we  can  compute  pretty  closely 
what  those  were  from  the  returns  of  the  assessors  as  to  inside  and 
outside  property  and  real  estate  other  than  town  lots.  "What  was 
included  under  the  head  of  "farms"  by  the  Census  Bureau  is  shown 
by  the  following  extract  from  the  instructions  issued  to  enumerators: 

A  farm,  for  census  purposes,  includes  all  the  land  under  one  management,  used 
for  raising  crops  and  pasturing  live  stock,  with  the  wood  lots,  swamps,  meadows, 
etc.,  connected  therewith,  whether  consisting  of  one  tract  or  of  several  separate 
tracts.  It  and  all  other  buildings  used  by  him  in  connection  with  his  farming 
operations,  together  with  the  land  upon  which  they  are  located.  If  the  individual 
conducting  the  farm  resides  in  a  house  not  located  upon  the  land  used  by  him  for 
farm  purposes,  and  his  chief  occupation  is  farming,  the  house  and  lot  on  which  it  is 
located  are  a  part  of  the  farm.  If,  however,  he  devotes  the  greater  portion  of  his 
time  to  some  other  occupation  the  house  in  which  he  resides  is  not  a  part  of  the 
farm.  If  the  land  owned  by  an  individual,  firm,  or  corporation  is  operated  in  part 
by  the  owner  and  in  part  by  one  or  more  tenants  or  managers,  or  if  the  land  is 
wholly  operated  by  tenants  or  managers,  the  portion  of  the  land  occupied  by  each 
is  a  farm,  ami  must  be  reported  in  the  name  of  the  individual  or  individuals  operat- 
ing it.  No  land  cultivated  under  the  direction  of  others  is  to  be  included  in  the 
report  of  the  land  operated  by  the  owner.  For  census  purposes,  market,  truck,  and 
fruit  gardens,  orchards,  nurseries,  cranberry  marshes,  greenhouses,  and  city  dairies 
are  "farms":  provided,  the  entire  time  of  at  least  one  individual  is  devoted  to  their 
care.  This  statement,  however,  does  not  refer  to  gardens  in  cities  or  towns  which 
are  maintained  by  persons  for  the  use  or  enjoyment  of  their  families  and  not  for 
gain.  Fublic  institutions,  as  almshouses,  insane  asylums,  etc.,  cultivating  large 
vegetable  or  fruit  gardens,  or  carrying  on  other  agricultural  work,  are  to  be  con- 
sidered farms. 

The  law  requires  the  assessor,  "when  practicable,"  to  report  the 
separate  value  of  each  class  of  land,  specifying  the  classes  and  number 
of  acres  of  each,  and  they  generally  classify  farms  as  "real  estate  other 
than  city  or  town  lots."  They  probably  do  not  include  the  following 
items  win  eli  are  among  the  things  included  by  the  Census:  ''market,  truck, 
and  fruit  gardens,  nurseries,  greenhouses,  city  dairies  and  public  insti- 
tutions." Nor  do  they  include  any  farming  operations  conducted  on 
lands  laid  out  in  city  or  town  lots.  On  the  other  hand,  they  include 
some  things  not  included  by  the  Census,  such  as  uncultivated  tracts 
not  laid  out  in  town  lots,  forest  land,  and  marsh  land.  Deducting 
•t7<Ui  17. 302,  the  value  according  to  the  Census  of  the  items  not  included 
by  the  assessors,  we  have  farm  Lands  and  buildings  worth  .$72«'»,  l.so.r»">;j 
assessed  a1  $  1 7  1. 7".  1,497,  or  about  65  ',.  The  two  items  do  not  refer 
precisely  to  the  same  things,  but  the  percentage  of  error  is  very  small. 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  65 

so  that  we  may  safely  draw  the  conclusion  that  farms  are  assessed  at 
about  65%  of  their  true  value.  As  this  is  so  large  a  part  of  the  entire 
roll — about  one  third  in  1900— it  is  safe  to  assume  that  the  average 
outside  tax  rate,  which  was  $1.74,  applied  to  this,  and  that  the  tax 
would  be  at  least  $8,265,000.  This  amount  of  tax  was  1.14%  of  the 
value  of  the  lands  and  buildings  only  as  returned  by  the  Census.  We 
know  comparatively  little  about  the  assessment  of  personal  property 
beyond  the  fact  that  farm  movables  are  visible,  and  unless  the  assessor 
is  very  negligent  are  generally  on  the  tax  roll.  The  Census  gives 
$88,614,995  as  the  value  of  implements,  machinery,  and  live  stock. 
If  we  assume  that  half  of  this  is  assessed,  or  about  $44,000,000,  and 
taxed  at  $1.74,  the  total  taxes  would  be  increased  by  $765,000,  or  to 
about  $9,030,000. 

Summary  of  farm  taxation  at  the  present  time. 

Per  cent  of  taxes  to  true  value 1.14 

Per  cent  of  taxes  to  gross  returns 6.86 

Per  cent  of   taxes   to   net   returns,   including   farmer's   own  com- 
pensation and  certain  expenses 9.88 

In  other  words,  the  taxes  paid  by  farmers  in  California  are  equivalent 
to  an  income  tax  of  about  10%.  No  other  industry  and  no  other  equally 
extensive  class  of  property  in  California  bears  such  a  burden  of 
taxation.* 

In  order  to  show  the  relative  burden  of  taxation  as  between  agri- 
culture and  manufactures,  we  have  prepared  the  following  table,  based 
mainly  upon  the  census  returns: 

Comparison  of  Taxes  on  Farms  and  Taxes  on  Manufactures  in  California. 

Aggregates.  Percentages  of  Total  Capital. 

Manufactures.  Agriculture.  Manufactures.  Agriculture. 

Capital  total 1205,395,025  $796,527,955  100.0  100.0 

Land 34,735,416  630,444,960  16.9  79.0 

Buildings 22,562,385  77,468,000  11.0         .  9.7 

Machinery,  resp.  implements.        62,440,759  21,311,670  30.4  2.7 

Otherassets 85,656,465  67,303,325  41.7  8.5 

*  Mr.  Easterday,  a  member  of  the  Washington  Tax  Commission,  writing  us  in 
comment  upon  our  Preliminary  Report,  says: 

i  ,iiu  inclined  to  think  that  in  the  discussion  of  taxes  on  farms,  etc.,  you  fail 
to  take  into  consideration  the  benefits  enjoyed  by  the  farmer,  or  as  we  call  him 
here,  the  rancher,  in  obtaining  from  his  ranch  a  large  amount  of  eatables  which 
are  n«»i  accounted  for." 

As  this  criticism  may  be  voiced  by  others, »it  is  pertinent  to  point  out  that  the 
census  returns  of  the  profit  of  farmers  includes  the  value  of  all  products  consumed 
on  the  farm  as  well  as  those  sold,  excepting  products  fed  to  live  stock.  The  latter 
were  quite  properly  omitted  as  the  value  of  the  live  stock  whether  used  or  sold  was 
included,  and  to  have  counted  the  cost  of  their  feed  would  have  been  to  include  the 
same   item   twice. 

5  —  RT 


til,  REPORT   OF   COMMISSION    ON    Kl.\  1  Nil:    AND    TAXATION. 

Comparison  of  Taxes  on  Farms  and  Taxes  on  Manufactures  In  California. — Cont'd. 

A.GGB1  Q4  I  B8.  PERCKNTAiiKS  OF  ToTAI.  CiiFITAL. 

Manufactures.  Agriculture.  Manufactures.  Agriculture. 

Assessed  value $63,500,000  $474,731,487                81.0                  65.0 

Taxes 1,049,932  9,030,000                     .61                    LM 

Gross  product 802,874,761  181,680,608                147.0                    16.5 

Netproduct 62,172,8  91,419,866*                26.4                    11.5 

Taxes  of  gross  product ;1''  '' M' 

Taxes  of  nel  product - 2.01  8.88 

Comment  on  foregoing  table. 

The  above  table  constitutes  a  most  telling  exhibit  of  the  inequalities 
of  our  tax  system. 

Manufactures  pay  V2  of  1%  on  tneir  capital  in  taxes;  farms  pay 
1.14%,  two  and  a  third  times  as  much.  Manufactures  pay  %  of  1% 
of  their  gross  income  in  taxes;  farms  pay  nearly  7%,  or  twenty  times 
as  much.  Manufacturers  pay  2%  of  their  net  income,  while  farmers 
pay  10%,  or  five  times  as  much.  If  we  allow  manufacturers  10%  on 
their  capital  as  a  fair  return  on  the  investment,  then  on  the  average 
manufacturers  should  pay  2.9%  on  gross  earnings  to  equal  which 
would  only  be  allowing  farmers  a  return  of  43^%  on  their  capital. 

The  same  facts  may  be  exhibited  in  another  way.  After  allowing 
$2,446,238  for  the  average  annual  increase  in  the  value  of  farm  property 
and  deducting  6%  as  interest  on  the  value  of  farm  property,  the  census 
estimates  that  the  145,801  persons  engaged  in  agriculture  earned  an 
average  of  $499.70  in  1899.  The  113,155  persons  engaged  in  manu- 
factures earned  an  average  of  $870. 

It  would  seem,  then,  that  from  the  per  capita  earnings  manufacturers 
could  afford  to  pay  nearly  75%  more  taxes  than  could  the  farmers.  As 
a  matter  of  fact,  however,  the  farmers  pay  10%  of  their  net  earning 
and  manufacturers  only  2%  of  their  net  earnings.  It  may  be  that  the 
people  desire  to  foster  manufactures  by  a  partial  exemption  from  taxa- 
tion,  but  it  would  appear  that  the  exemption  granted  goes  far  beyond 
wbat  is  probably  intended. 

The  persons  engaged  in  agriculture  pay  on  the  average  $50  per  capita 
each  year  in  taxes  out  of  an  average  income  of  about  $500.  The 
persons  engaged  in  manufactures  pay  on  the  average  $17.50  per  capita 
each  year  in  taxes  out  of  an  average  income  of  $870. 

Taxation  of  real  estate  in  cities  and  in  the  country. 

The  Commission  obtained   returns  for  about  two  hundred  Beparate 

p., i<<]s  of  real  estate  in  San   Franeiseo.     Other  returns  in  preparation 

by  various  real  estate  houses  who  volunteered  to  assist  were  destroyed 

at  the  time  of  the  fire.  

*  [ncludinp  *ome  Items  analogous  t>>  wages  and  certain  items  of  expense  eliminated 
in  tiic  case  of  manufactures. 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  67 

The  returns  we  have  show  in  general  that  city  real  estate  pays  taxes 
amounting  to  11.2%  of  the  gross  earnings.  The  rate  is  lower  in  the  case 
of  flats,  apartment  houses,  etc.,  where  the  gross  receipts  include  pay- 
ments for  things  other  than  mere  occupancy,  such  as  service,  and  high- 
est in  the  case  of  business  and  office  blocks.  Twenty-one  parcels  of 
"good  paying"  business  property  paid  taxes  ranging  from  10.14%  to 
28.90%  of  the  gross  income,  an  average  of  20.2%.  On  the  average  for 
business  property,  70%  of  the  gross  earnings  is  net;  this  is  less  than  for 
residence  property,  higher  than  for  flats,  apartments  and  the  like. 

These  figures  can  be  regarded  as  suggestive  or  illustrative  merely. 
To  make  an  average  properly  comparable  with  the  figures  we  have  for 
farms  would  have  required  a  long  and  expensive  investigation  far 
beyond  the  means  of  the  Commission  and  more  costly  than  would  have 
been  warranted  by  any  results  that  might  have  been  obtained.  More- 
over, the  plan  proposed  by  the  Commission  will  remove  all  significance 
from  those  inequalities. 

The  average  rate  of  taxation  on  city  property  throughout  the  State 
is  $2.55  per  $100  of  assessed  valuation.  The  assessed  value  is  normally 
60%  of  the  true  value,  so  that  the  actual  tax  is  1.53%  on  the  capital 
invested,  as  against  1.14%  for  outside  or  rural  property. 

The  country  or  rural  rates  of  taxation  are  normally  or  in  the 
"average"  about: 

For  State  tax $0.50  per  $100  of  assessed  valuation. 

For  county  tax ---  0.85  per  $100  of  assessed  valuation. 

For  road  tax - 0.40  per  $100  of  assessed  valuation. 

Total ..$1.75  per  $100  of  assessed  valuation. 

1.14%  of  the  true  value. 

The  city  rates  average  about: 

For  State  tax $0.50  per  $100  of  assessed  valuation. 

For  county  tax 0.85  per  $100  of  assessed  valuation. 

For  city  tax 1.20  per  $100  of  assessed  valuation. 

Total $2.55  per  $100  of  assessed  valuation. 

1.53%  of  the  true  value. 

It  will  thus  be  seen  that  real  estate  in  cities  pays  a  somewhat  higher 
tax  than  country  real  estate.  But  the  owner  of  city  real  estate  escapes 
taxation  in  larger  measure  on  his  personal  property  than  does  the 
average  farmer,  which  more  than  offsets  this.  The  difference,  however, 
is  only  four  tenths  of  1%  on  the  true  value.  For  this  slight  difference 
the  urban  real  estate  obtains  all  the  benefits  of  city  government. 

The  fact  that  real  estate  pays  85%  of  all  our  taxes  must  be  constantly 
borne  in  mind.  This  fact  accounts  fully  for  the  overburdening  under 
which  the  farmer  groans.  Of  the  capital  which  the  farmer  uses  89%  is 
real  estate,  all  taxed.  Of  the  capital  used  in  manufactures  only  28% 
is  real  estate,  and  little  of  the  remainder  is  taxed. 


UKI'ORT   OF   COMMISSION   ON   REVENUE  AND   TAXATION. 

Inequalities  between  different  classes  of  corporations. 

The  inequalities  of  our  present  tax  system,  as  applied  to  different 
classes  of  corporations,  will  be  discussed  in  detail  in  connection  with 
the  special  discussion  of  the  taxation  of  each  class  of  corporations  below. 

The  following  table  brings  together  for  comparison  some  of  the  more 
important  of  the  figures. 

Taxes  Paid  by  Different  Classes  of  Corporations. 

Taxes  to  Taxes  to 

Capital.        Gross  Earnings. 

State  commercial  banks — -       -65  

Savings  banks  - 1-02  

National  banks  -- 20  

Railroads    - - - 65  364 

Si  net  railroads   ..   - -- - 605  4.01 

Express  companies - - 14  ■*>« 

Telephone - - — 52  -■,i:> 

Telegraph - 33  1.66 

Light,  heat,  and  power 58  3.03 

Water  companies  (excepting  Spring  Valley) 66  7.09 

Spring  Valley 1-26  16.09 


REPORT  OF   COMMISSION   ON   REVENUE   AND   TAXATION.  69 


CHAPTER  IV. 

CITY  TAXES  IN  CALIFORNIA. 


City  taxes  are  levied  on  property  within  the  city  limits.  The 
assessment  of  such  property  and  the  enforcement  of  the  collection  of 
city  taxes  is  regulated  by  laws  substantially  the  same  as  those  for  State 
and  county  taxes.  There  is  one  glaring  evil  in  this  connection  which 
the  plan  suggested  by  the  Commission  would  remove. 

Separate  city  assessment  and  collection  an  unnecessary  waste. 

Many  of  the  cities  provide  in  their  charters  for  an  assessment  of 
property  for«the  purposes  of  city  taxation  separate  and  apart  from  the 
assessment  made  by  the  county  assessor.  This  in  turn  involves  the 
collection  of  city  taxes  separately  from  State  and  county  taxes. 

It  involves,  further,  the  support  of  a  city  assessor's  office  and  a  city 
tax  collector's  office.  This  is  a  waste  of  public  money  entirely  unneces- 
sary under  the  plan  proposed  by  the  Commission. 

It  furthermore  usually  imposes  on  the  taxpayer  the  necessity  of  pay- 
ing taxes  in  two  different  places,  of  looking  after  two  assessments  and 
two  sets  of  tax  bills. 

This  is  a  waste  of  the  taxpayer's  time  and  money  and  an  annoyance 
entirely  unnecessary  under  the  plan  proposed  by  the  Commission. 

Origin  of  this  extravagance. 

This  waste  of  public  money  and  of  the  taxpayer's  time,  money,  and 
temper  arose  under  the  present  system  in  the  following  manner:  Most 
of  the  cities  have  in  their  charters  a  fixed  limit  beyond  which  the  tax 
rate  may  not  go.  In  order  to  get  sufficient  money  to  run  the  cities,  the 
tax  rate  being  fixed,  the  assessment  must  be  raised.  There  is  a  desire 
to  avoid  raising  the  assessment  as  part  of  the  county  roll,  on  account  oi 
the  increase  in  State  and  county  taxes  which  would  result.  Hence,  the 
cities  chose  to  go  to  the  expense  of  a  separate  assessment. 

Under  the  plan  proposed  by  the  Commission  this  would  all  be  unnec- 
essary and  the  city  taxes  could  be  levied  on  the  county  roll,  collected 
by  the  county  tax  collector  on  one  bill  with  the  county  taxes,  and 
remitted  to  the  city  treasurers.  A  tax  rate  far  below  the  limit  set  by 
the  charters  would  be  possible,  because  of  the  increase  to  be  expected 
in  the  countv  rolls. 


70 


REPORT    OF    COMMISSION    ON     KKYl.NIK    AND    TAXATION. 


This  is  one  of  the  incidental  advantages  of  "Home  Rule  in  Local 
Taxation." 

The  following  tables  give  the  data  collected  in  regard  to  city  taxes 
and  used  in  various  parts  of  this  Report: 


CITY  TAXES  IN  CALIFORNIA. 

Assessed  Valuations,  City  Tax  Rate,  and  Taxes  Levied  In  1905,  for  122  Cities  Reported 

to  this  Commission. 

N.  B.— Column  B,  "  Citv  Tax  Riitc,"  glvet  t lie  tux  rule  levied  for  city  purposes  only.  To  ascer- 
tain the  total  tax  rate  levied  "ii  property  In  any  city  the  " inside "  tax  rate  given  opposite  the 
name  of  the  county  should  be  added  to  the  city  tax  rate. 


City. 


State  aii'l 

County 

Tax  Kate. 


Assessment. 


City 
Tax  Rate. 


City  Taxes. 


Alameda  County 

Alameda 

Berkeley 

Emeryville 

Hay  wards.. 

Liver  more. 

Oakland 

Pleasanton  

>:m  Leandro 

Butte  County 

Bif-'Rs.-. 

Gridley 

Chico .. 

Oroville 

Colusa  County 

Colusa  

Contra  Costa  County 

Antioch .. .. 

Concord ... 

Martinez 

Del  Norte  County. .- 

Crescent  City 

El  Dorado  County 

Placerville 

Fresno  County 

Fresno  

Selma 

Glenn  County 

Will,, us.' 

Humboldt  County. .. 

Areata  . . 

Eureka 

ETerndale 

Inyo  County 

Bishop  - 

Kern  County 

Bakersfield  ..  ... 
Kings  County  

Banford  

Lemoore 

Lake  County. 

Lakeport 

LasBen  I  lounty    

inville  

Los  A  Dgelee  County 

Alliambra 

Covina 

I  [oily  wood 

Long  Beach 

Los  A  Dgelee 

Monrovia  . 

Ocean  Park  

P      1'lena 

Pomona 


$1  40 


1  60 


1  21 


1  60 


2  15 


1  50 


1  70 
l~3u' 


1  80 


l  :;.; 


1  42 


1  71 


1  87 


1   1(1 


1  25 


$12.7t;i.>L' 

16,420.01  <i 

1.2(12,658 

L,103,551  , 

653,696 

56,013,025 

385,803  [ 

1,0.50,000 


$1  28 
85 
;,(i 
90 
75 
i  L't; 
85 
78 


$163,350  81 

139,570  14 

6,013  29 

;i  96* 

4.:M)2  72 

705,764  12 

3,279  33 

7,875  00 


222,176 
No  data 
1,717,890 
No  data 

1  40 
1  45 
1  45 
1  45 

3,110  46 

No  data 

24,909  41 

No  data 

860,568 

1  25 

10,757  10 

No  data 
137,215 
637,579 

1  20 
40 
75 

No  data 

548  86 

4.7M  84 

305,919 

60 

1,835  51 

677,335 

70 

4,741  35 

9,653.002 
No  data 

1  15 
75 

111,009  52 
No  data 

621, 77J 

60 

;,730  63 

650.000 

6,297.111 

511,076 

1  00 
1  00 
1  01 

6,500  00 

62,974  44 

5,161  87 

341,134 

i   BO 

6,140  41 

3,051,792 

1  28 

39,062  94 

1,546,341 
No  data 

1  235 

1  45 

L9.097  31 
No  data 

333,680 

90 

8,003  12 

358,c:,:i 

30 

1,07.,  98 

B49.224 

117.(i.r.7 

2,159,600 

1,535,820 

156,266,509 

No  ,1a la 

4,44(),(KI0 

20,015.140 

3,204,09] 

75 
96 

l  :■'.;, 

1  20 

2  00 
7:> 

1  315 
1  70 

6,369  18 
1,252  74 

17,923  85 
81,233  57 

1,875,198  11 

No  data 

33,300  00 

263,199  06 

54,46!)  66 

REPORT  OF   COMMISSION   ON   REVENUE  AND   TAXATION. 


71 


City  Taxes  in  California.— Continued. 


City. 


State  ami 

County 

Tax  Rate. 


Los  Angeles  County 

Redondo 

San  Pedro 

Santa  Monica  — 

South  Pasadena. 

Whittier 

Marin  County 

San  Rafael 

Mendocino  County 

Fort  Bragg-- 

Ukiah 

Willita 

Merced  County 

Merced • 

Monterey  County 

Monterey 

Pacific  Grove 

Salinas    

Napa  County. . 

Calistoga 

Napa  .-- -- 

St.  Helena 

Nevada  County  .   -.. 

Grass  Valley 

Nevada  City 

Orange  County 

Anaheim 

Fullerton 

Orange 

Santa  Ana 

Placer  County 

Auburn 

Riverside  County 

Corona 

Elsinore 

Riverside  

San  Jacinto 

Sacramento  County 

Sacramento 

San  Benito  County 

Hollister 

San  Bernardino  County . 

Colton 

Ontario     

Redlands... 

San  Bernardino 

San  Diego  County 

Brawley    

Escondido 

Imperial 

National  City 

Oceanside 

San  Diego .     .  

San  Francisco  County  .. 

San  Francisco 

San  Joaquin  County 

3tocKton 

San  Luis  Obispo  County 

Paso  Robles 

San  Luis  Obispo 

San  Mateo  County 

Redwood  City.. 

S;tn  Mateo 

Santa  Barbara  County  .. 

Santa  Barbara 

Lompoc  — 


$1  10 


1  35 


1  60 


1  45 


1  35 


1  33 


2  25 


1  25 


Assessment. 


1  80 


1  50 


2  00 


1  57 


1  80 


1  65 


(State)49 


1  25 


1  38 


1  458 


1  40 


City 
Tax  Rate. 


$673,002 
1,738,560 
3,850,677 
2,342,158 
1,800,708 

3,302,878 

436,575 

983,082 

1,128,460 

1,250,051 

1,241,562 
1,345,055 
1,680,162 

389,185 
3,090,396 
1,039,000 

1,417,440 
883,575 

647,226 

748,164 

670,548 

2,952,502 

826,590 

859,728 

204,150 

7,379,685 

190,000 

20,006,515 

914,045 

522,700 
1,062,755 
3,431,785 
2,663,157 

291,092 
510,609 
478,166 
6!Kt,77U 
374,371 
17,052,000 

524,392,047 

14,772,496 

588,100 
1,843,819 

1,114,883 

1,750,000 

7,088,324 
491,500 


$0  75 
95 

1  43 
85 

1  65 

1  00 

75 
85 
35 

1  10 

75 

85 

1  35 

65 
90 
75 

75 
1  00 


City  Taxes. 


25 
75 
10 
25 

90 


95 
1  35 

1  10 

2  10 

1  60 

1  00 

2  25 
1  54 
1  10 

1  78 

2  25 
70 

1  65 

75 

1  75 

1  45 

1  164 

1  65 

1  20 
1  50 

1  CM 
1  17 

1  30 
70 


$5,047  52 
16,516  32 
55,064  68 
19,908  34 
29,711  68 

33,028  78 

3,274  31 
8,356  20 
3,949  61 

13,750  56 

•  9,311  72 
11,432  97 
22,682  19 

2,529  70 

27,813  57 

7,792  50 

10,630  80 
8,835  75 

8,090  33 

5,611  23 

7,376  03 

66,431  30 

7,439  31 

8,167  42 

2,756  03 

81,176  54 

3,990  00 

320,104  24 

9,140  45 

11,525  54 
16,366  43 
37.749  64 
47,404  19 

6,547  60 
3,574  26 
7,889  74 
5,248  29 
6,551  49 
247,254  00 

6,103,922  88 

243,746  18 

T.H57  20 
•J7,<i57  29 

16,648  88 

Ji  i.  475  00 

82.148  21 

3,440  50 


7l> 


REPORT   OF   COMMISSION    ON    REVEN1  E    AND   TAXATION. 


City  Taxes  in  California.  —Continued. 


City. 


Shu.'  and 

Count v 

Tax  Rate. 


-inent. 


City 
Ih\  Rate. 


City  Taxes. 


Santa  Clara  County 

(iilroy. 

Los-  GatOfl     

Mayfield 

Mountain  View 

Palo  Alto 

San  .Inst' 

Santa  Clara 

Santa  Cruz  County 

Santa  Cruz 

Watsonville 

Shasta  County 

Redding 

Siskiyou  County 

E"tna- 

Fort  Jones 

Yreka 

Solano  County 

Benicia   

Dixon  

Rio  Vista 

Suisun  City 

Vaeaville 

Vallejo... 

Sonoma  County... 

Cloverdale  

Healdsburg 

Petaluma  .. 

Santa  Rosa 

Sebastopol  

Sonoma 

Stanislaus  County  - 

Modesto 

Tehama  County 

Red  Bluff 

Tulare  County 

Porterville 

Tulare   

Visalia 

Tuolumne  County  . 

Sonora  

Ventura  County  ... 

Santa  Paula. ... 

Ventura   

Yolo  County 

Winters 

Woodland   

Yuba  County 

Marysville 

Wheatland 


Entire  State. 


$1  24 


1  90 


1  HO 
Y26 


1  35 


1  55 


1  60 
"i'§5 
T30 


1  63 
235 


1   15 


2  50 


$S23,000 
898,706 
461,483 

530.1  KK) 

2,989,325 

L6,580,540 

1,589.180 

4,420,510 

1.605,910 

1,689,871 

Xo  data. 
132,625 
508,700 

835,680 

380.! '22 
208,923 
419,660 
438,679 
3,501,064 

383,490 
879,418 
3,109,256 
4,206,535 
407.125 
319,405 

1,486,965 

1,485,915 

465,000 

562,688 

1,496,656 

880,575 

608,919 
785,637 

252,750 
2,126,846 

1,855,685 
149,515 


$1  INI 

1  10 
1  31 
1  00 
90 
1  20 

1  22 

2  00 
85 

85 


70 

30 

1  60 

1  10 

1  45 

1  25 

1  25 

75 

so 


75 

20 
25 
50 
75 

70 


1  15 

85 

75 

1  65 

2  00 


70 
95 

1  15 

1  50 

2  60 
2  50 


$1  35  $1,011,963,126 


|1  20 


9,896  76 
6,045  56 
5,300  00 

26,084  93 
1.98,966  4S 

18,388  <"> 

88  HO  20 
13,650  24 

13,598  90 

No  data. 

397  88 

8,139  20 

9,192  59 

5.52::  37 

2,613  54 

5,245  75 

3,290  08 

28,00s  51 

2,876  is 

10,553  02 

38,865  70 

63.098  03 

3,053  44 

2,235  84 

17,10<>  10 

22.630  28 

3,487  50 

9,284    16 

28,933  12 

6,604  31 

4.262  43 
463  55 

2,906  63 
31,802  69 

48,217  -1 
3,737  88 


$12,140,933  12 


•  Average. 


Taxation  in  San  Francisco. 

The  assessed  valuation  of  property  for  purposes  of  luxation  in  San 
Francisco,  the  chief  city  of  the  State,  is  of  peculiar  interest  at  this  time. 

The  year  before  the  great  fire  the  assessed  valuation  of  property  in 
San  Francisco  was  $524,385,667,  which  was  very  nearly  one  third  of  the 
entire  assessed  valuation  of  the  State.  After  the  great  fire  this  shrank 
to  Jf?:376,138,737,  which  was  only  a  little  less  than   one   fourth   of  the 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 


73 


entire  valuation  of  the  State.     The  loss  by  fire  was  $148,246,930,  or  28 
of   the  total    assessed    valuation  in  San  Francisco,  and    a    little    over 
9%  of  the  total  assessed  valuation  of  the  State. 

Expressed  in  round  numbers  as  nearly  $150,000,000,  this  loss  seems 
enormous,  but  when  compared  with  the  total  resources  of  the  city  and 
especially  of  the  State,  it  is  relatively  unimportant.  The  increase  in 
taxable  property  outside  the  city  was  nearly  $120,000,000,  leaving  a  net 
loss  of  only  $31,000,000. 

The  following  table  shows  the  history  of  the  assessed  valuation  of 
San  Francisco.  The  fire  extinguished  the  growth  of  the  past  eight 
years.  Once  in  the  history  of  the  city  her  assessed  valuations  increased 
$184,000,000  in  a  single  year,  or  more  than  the  entire  loss  by  the  fire. 
Seven  times  the  tax  roll  increased  a  greater  percentage  in  a  single  year 
than  the  percentage  loss  by  the  great  fire: 

Assessed  Values,  City  and  County  of  San  Franeiseo. 


1850 $21,621,184  00 

1851 17,794,711  00 

1852 18,481,737  00 

1853 32,377,893  00 

1854.. 35,796,475  00 

1855 32,841,027  76 

1856 30,368,254  00 

1857 39,706,105  00 

1858 30,725,950  00 

1859 33,777,075  00 

1860 35,967,499  00 

1861 41,845,119  00 

1862 66,531,207  00 

1863. 78,689,732  21 

1864 80,736,164  84 

1865 88,913,523  34 

1866.. 95,972,470  15 

1867 109,034,726  88 

1868 106,358,806  60 


1869 $114,821,623  67 

1870 116,375,988  67 

1871 104,991,359  85 

1872. 288,583,256  90 

1873. 212,393,318  00 

1874 264,116,294  00 

1875 268,532,859  00 

1876 260,576,978  00 

1877 254,865,810  00 

1878. 244,626,760  00 

1879 217,389,336  00 

1880 253,520, 326  00 

1881 239,423,660  00 

1882 202,120,042  00 

1883 253,222,947  00 

1884 244,873,305  00 

1885 254,325,959  00 

1886 230,151,009  00 

1887 251,746,111  00 


1888 $273,389,616  00 

1889 291,583,668  00 

1890 301,438,040  00 

1891 399,826,077  00 

1892 412,047,076  00 

1893 342,644,179  00 

1894 371,567,781  00 

1895 327,845,342  00 

1896 422,069,716  00 

1897 347,954,920  00 

1898  ....  352,348,707  00 

1899 405,111,575  00 

1900 410,146,954  00 

1901 413,146,827  00 

1902 419,968,644  00 

1903 545,866,446  00 

1904 502.895,359  0) 

1905 524,230,936  00 

1906 376,138,737  00 


Chart  of  assessed  valuations  in  San  Francisco. 

The  following  chart  displays  more  clearly  than  the  table  the  history 
of  assessed  valuation  in  San  Francisco. 

This  chart  is  drawn  on  the  same  plan  as  the  one  showing  the  assessed 
valuation  of  the  State.  The  upper  group  of  lines,  the  one  marked 
"Rates  of  Increase  in  Assessment  Roll,"  shows  by  its  angle  each  year 
the  percentage  of  increase  (or  decrease)  of  that  year  on  the  total  roll 
of  the  year  before.  The  heavy  line  shows  the  trend,  cleared  of  the 
disturbing  annual  fluctuations.  The  second,  or  lower,  group  of  lines 
shows  the  total  assessed  valuation  drawn  in  the  ordinary  way.  The 
heavy  line  shows  the  trend  in  absolute,  not  relative,  amounts.  Th<  se 
lines  show  the  same  facts  as  the  upper  lines,  but  do  not  bring  out  the 
rates  of  increase,  merely  the  absolute  amounts.  The  proportional 
decrease  due  to  the  great  fire  is  best  shown  by  the  upper  line. 


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-r         L  23                                                                             ~ 

PART  III. 


PROPOSALS  AND  RECOMMENDATIONS. 


CHAPTER  I. 

SEPARATION  IN  GENERAL. 


Introduction  and  definition. 

The  separation  of  State  from  local  taxation  as  to  sources  of  revenue 
has  come  to  be  generally  recognized  as  the  one  feasible  pathway  for  tax 
reform. 

As  this  Commission  uses  the  term  "separation  of  sources"  it  means 
that  the  counties  and  local  governments  shall  tax  only  the  private  or 
individual  real  estate  and  tangible  property  within  their  boundaries, 
property,  that  is,  which  is  clearly  and  distinctly  localized.  This  class 
of  property  has  a  distinctly  local  situs  and  benefits  obviously  and 
directly  by  local  government.  Upon  this  class  of  property  there  shall 
ultimately  be  no  State  tax.  The  State,  on  the  other  hand,  shall  tax  all 
those  industries,  and  classes  of  property  sometimes  called  "corporate" 
to  distinguish  them  from  the  "private  or  individual"  industries  and 
properties.  Such  property  does  not  have,  in  the  same  sense,  a  local  situs ; 
it  extends  over  many  communities,  serves  all,  and  all  contribute  to  its 
income.  Steam  and  electric  railroads,  telegraph  and  telephone  com- 
panies, express  companies,  insurance  companies,  banks,  trust  and  loan 
companies,  light,  heat  and  power  companies,  and  even  certain  manufac- 
turing and  trading  companies  with  branches  in  different  localities,  all 
of  these  have  no  distinct  local  situs,  as  does  a  piece  of  land,  or  a  business 
block.  The  characteristic  of  all  such  corporate  enterprises  is  that  the 
value  of  the  business  which  they  carry  on  in  any  particular  municipality 
is  more  or  less  intimately  dependent  upon  the  business  carried  on  by 
them  in  one  or  more  other  municipalities,  rural  or  urban,  and  can  not, 
therefore,  be  properly  estimated  or  taxed  in  any  one  place,  or  even  in  a 
series  of  places.  Such  property  and  industries  are  general.  They 
belong  to  the  people  of  the  State  as  a  whole,  not  to  any  particular 
community  in  which  by  accident  their  rails,  wires,  or  offices  may  be. 

The  general,  non-local,  character  of  corporate  property  is  so  obvious 
that  it  seems  almost  superfluous  to  argue  that  the  taxes  thereon  do  not 
belong  to  the  localities.  But  as  this  idea  is  comparatively  new  in 
practice  it  may  need  illustration.  A  carload  of  butter  and  cheese  may 
be  shipped  from  Humboldt  county  by  water  to  San  Francisco  and 
thence   by    rail    to    New    Orleans.      On    its   way    it    will    pass   throuerh 


78  R]  I'ORT  OF   COMMISSION  ON   REVENUE  AND  TAXATION. 

many  counties.  We  should  hold  it  robbery  if  each  county  erected 
toll-gates  and  collected  tolls  on  that  carload  of  Humboldt  products. 
But  that  is  practically  what  we  allow  when  we  permit  the  counties 
to  tax  the  railroads.  Or,  again,  a  vineyardist  in  Napa  may  ship 
a  cargo  of  wine  to  London;  a  San  Francisco  bank  buys  the  bill  and 
"finances"  the  operation.  San  Francisco  in  taxing  the  banks  virtually 
levies  a  toll  on  the  Napa  vineyardist's  goods.  Every  year  the  banks 
bring  in  large  sums  of  money  to  "move  the  crops."  This  money  goes 
all  over  the  State,  even  into  localities  where  there  are  no  banks.  Every 
producer  in  the  State  contributes  to  the  profit  which  the  banks  make 
on  the  transaction.  Why  should  this  business  be  taxed  in  San  Francisco, 
Stockton,  Sacramento  or  Los  Angeles  only?  The  business  is  general, 
and  the  taxes  on  it  should  be  for  the  support  of  the  State  government, 
which  represents  all  the  people  and  all  parts  of  the  State  alike.  Does 
the  fact  that  San  Bernardino  county,  Nevada  county,  and  Siskiyou 
county  sit  at  the  gateways  through  which  the  railroads  enter  the  State 
give  them  a  right  to  tax  every  yard  of  cloth,  every  box  of  crackers,  every 
plow,  and  all  the  other  multitudinous  wares  which  the  people  of  this 
commonwealth  bring  in?  Many  counties  not  situated  on  the  line  of  any 
railroad  nevertheless  contribute  to  its  traffic.  By  what  right  are  they 
to  be  deprived  of  the  taxes  levied  on  this  traffic?  If  the  railroads  are 
taxed  by  the  State  alone  and  for  State  purposes  alone,  every  dollar  of 
taxable  property  in  the  State,  whether  on  the  line  of  the  railroad  or 
not,  is  benefited,  for  the  amount  paid  into  the  State  treasury  from  this 
source  lessens  the  tax  on  all  property  in  the  State. 

The  right  to  do  business  that  is  enjoyed  by  corporations  is  a  privilege 
granted  by  the  State,  and  not  by  the  cities  or  counties.  Therefore,  any 
tax  that  may  be  levied  upon  the  revenues  derived  from  the  enjoyment 
and  use  of  the  State  privileges  used  by  corporations,  especially  public- 
service  corporations,  ought  to  be  paid  into  the  State  treasury  for  the 
support  of  the  State  government,  from  which  the  privileges  are  derived, 
rather  than  into  city  and  county  treasuries. 

Obviously  there  is  a  perfectly  clear  line  of  demarkation  between 
property  local  in  character  which  should  be  subject  to  local  taxation  and 
property  or  industries  general  in  character  which  should  be  subject  to 
general  or  State  taxation. 

To  accomplish  separation  it  is  necessary  to  define  clearly  and  sharply 
the  boundary  line  between  State  and  local  powers  of  taxation.  This 
boundary  line  having  been  once  defined,  neither  of  the  two  parties 
shall  trespass  upon  the  territory  set  apart  for  the  other.  It  implies 
that  there  shall  be  an  end  to  the  everlasting  piling  up  of  rate  on  rate  on 
the  same  subjects  or  the  same  foundation,  which  is  the  bane  of  our 
present   system  of  taxation. 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  79 

Separation  will  give  the  counties  substantial  home  rule  in  matters 
concerning  their  own  taxation,  and  to  the  same  extent  there  will  be  home 
rule  in  matters  concerning  city  taxation. 

Within  strictly  denned  limits  the  county,  or,  respectively,  the  city, 
should  be  permitted  to  determine  its  own  policy  concerning  the  raising 
of  revenue.  This  does  not  preclude  general  laws  intended  to  bring  about 
a  certain  amount  of  uniformity  as  to  methods,  but  it  does  preclude 
that  constant  deference  to  the  effect  of  State  or  other  sur-taxes  which 
tends  to  divert  the  attention  of  the  assessing  officers  from  their  primary 
duty,  which  is  to  establish  uniformity  and  equality  of  taxation  between 
man  and  man.  It  is  indisputable  that  separation  would  abolish  the  chief 
incentive  to  and  cause  for  undervaluations  and  remove  the  chief  source 
of  the  existence  of  discriminations. 

Separation  would  at  once  abolish  all  the  evils  which  "equalization" 
is  intended  to  prevent,  but  which  it  unfortunately  fails  to  remedy. 

The  crude  assumption  that  each  and  every  interest  should  be  taxed  in 
the  same  way  in  proportion  to  the  property  which  it  uses  is  one  of 
the  fundamental  iniquities  of  our  present  system.  This  it  is  which 
prevents  us  from  taxing  each  interest  in  accordance  with  its  ability 
to  pay. 

Theoretical  considerations. 

The  theoretical  principle  for  the  separation  of  State  from  local 
taxation  is  found  in  part  in  the  natural  distribution  of  functions 
between  State  and  local  governments.  The  activities  of  the  local 
governments,  such  as  the  protection  of  property  by  the  police,  the 
fire  departments,  the  local  courts,  the  construction  and  maintenance 
of  roads,  streets,  bridges,  and  the  like;  the  provision  for  schools,  the 
care  of  the  sick  and  of  the  poor,  redound  distinctly,  directly,  and 
peculiarly  to  the  benefit  of  local  real  estate  owners,  or  local  industries 
and  enhance  and  sustain  the  value  of  real  estate  and  of  other  tangible 
properly  in  the  localities.  This  has  always  been  the  ground  for 
making  local  governmental  expenses  a  local  charge.  Separation  makes 
no  change  in  this  respect,  but  it  does  propose  to  relieve  local  property 
from  State  taxes  and  from  the  expenses  of  general  activities,  the  benefits 
of  which  are  not  directly  traceable  to  the  activities  of  the  local 
government. 

In  the  counties  outside  of  the  cities,  the  chief  local  industry  is  agri- 
culture, and  it  seems  peculiarly  fitting  that  the  local  industries  sbould 
bear  the  expenses  of  its  own  protection  and  support  the  local  char_ 
There  is  probably  no  better  way  of  apportioning  the  taxes  among  a 
group  of  farmers  for  the  support  of  the  charges  of  the  local  government 
than  by  the  taxation  of  real  estate.  The  property  tax  originated  as 
a  neighborhood  tax,  and  works  best  when  used  to  apportion  neighbor- 


BO  REPORT  OF   COMMISSION    ON    REVENUE    AND    TAXATION. 

hood  charges  among  neighbors.  It  can  be  made  effective  only  among 
a  group  of  persons  who  know  each  the  other's  affairs  to  a  large  extent, 
and  where  deception  and  concealment  is  not  easy. 

In  cities,  generally,  it  is  the  growth  of  the  city  that  gives  value  to 
real  estate.  This  may  be  admitted  without  going  the  full  length  of 
the  claims  of  the  single  taxers,  that  it  is  the  activities  of  the  city  alone 
which  give  value  to  real  estate.  From  either  point  of  view  it  seems 
proper  that  such  property  should  bear  the  greater  part  of  the  expenses 
of  the  city  which  creates  its  value.  Strong  arguments  have  been 
advanced  in  support  of  the  contention  that  the  local  expenses  should  be 
limited  to  the  amount  which  the  local  real  estate  can  afford  to  pay: 
whether  these  arguments  are  valid  or  not,  they  point  the  conclusion 
that  real  estate  should  pay  the  local  expenses. 

On  the  other  hand  the  activities  of  the  State  are  all  broad  and  general. 
This  is  uniformly  recognized  in  the  constitutional  provisions  now  found 
in  almost  all  State  constitutions  prohibiting  local  or  special  laws.  The 
duties  of  the  State  are  mainly  legislative.  It  provides  a  uniform  code 
of  laws,  the  same  throughout  its  entire  territory.  It  provides  laws 
under  which  business  is  conducted.  It  grants  charters  to  industrial 
and  other  corporations.  It  administers  such  public  institutions  as  are 
in  no  sense  local  in  character.  In  general  the  State  cares  for  all  those 
interests  that  are  too  broad  or  too  large  for  the  local  governments  to 
handle. 

Corresponding  almost  precisely  to  the  general  activities  of  the  State 
government,  we  find  the  properties  and  business  of  the  great  public 
service  corporations  which  pervade  the  whole  State,  such  as  the  rail- 
roads, the  telegraph  and  telephone  companies,  the  express  companies, 
and,  of  late,  the  light,  heat,  and  power  companies,  which  have  spun 
thmr  wires  like  a  spider's  web  over  many  communities,  or  the  insurance 
companies  and  the  banks,  whose  business  is  in  no  sense  confined  to  one 
locality.  These  industrial  corporations  are  distinctly  and  peculiarly 
the  creatures  of  the  State,  and  it  is  to  the  State,  and  not  to  the  counties 
or  the  cities,  that  we  naturally  turn  for  their  regulation  and  control. 
They  serve  the  people  of  the  State  as  a  whole,  and  are  prohibited  from 
bestowing  favors  on  any  one  com  in  unity.  There  is  little  or  nothing 
localized  about  them,  nor  do  they  benefit,  save,  possibly,  in  so  far  as 
their  local  franchises  are  concerned,  in  the  same  peculiar  and  direct 
manner  as  does  private  individual  real  estate  by  the  activities  of  the 
local    government. 

There  is,  thus,  ample  theoretical  ground  for  making  a  separation  as 
to  the  sources  of  State  taxation  from  those  of  local  taxation.  The 
general  classes  of  corporations  which  we  have  had  under  consideration 
are  so  broad  in  their  activities,  their  stockholders,  and,  including  for 
the  nonce  the  oft  forgotten  consumers  of  their  products,  or  of  their 


REPORT   OF   COMMISSION   ON   REVENUE  AND   TAXATION.  81 

services,  are  so  widely  scattered  that  the  propriety  of  taxing  them, 
where,  bv  some  accident  of  organization  or  of  legal  enactment,  their 
head  office  may  be  or  their  property  may  lie,  is  clearly  illogical. 

Practical  considerations. 

The  practical  reasons  for  the  separation  of  State  from  local  taxation 
are: 

1.  Complete  separation  will  abolish  at  once  the  expense,  friction,  and 
annoyance  of  the  vain  attempt  to  equalize  between  the  different  counties. 
Partial  separation  will  lessen  this  evil,  because  as  the  proportion  of 
State  taxes  to  the  total  tax  burden  on  each  citizen  is  reduced  the  induce- 
ment to  undervaluation  is  reduced  in  like  proportion. 

A  large  part  of  the  inequalities  in  the  assessment  have  their  origin 
in  the  attempt  of  assessors  to  save  part  of  the  State  burden  to  the 
county  by  undervaluation. 

The  State  assessment  roll  in  California  is,  as  a  consequence  of  the 
prevailing  tendency  to  undervaluation,  practically  at  a  standstill. 

From  1850  to  1860  the  assessed  valuation  increased  from  $57,000,000 
to  $11S,000,000,  or  at  the  rate  of  16%  per  annum. 

From  1860  to  1870  the  increase  was  at  the  rate  of  8.7%  per  annum. 

In  1872  the  codes  were  adopted  and  the  State  Board  of  Equalization 
established.  Such  was  the  activity  of  this  board  and  the  efficiency  of 
the  new  law  that  the  assessment  increased  by  130%  in  two  years,  from 
1870  to  1872. 

From  1872  to  1880  the  increase  was  only  at  the  rate  of  1.3%  per 
annum. 

From  1880  to  1890  the  rate  of  increase  was  6%%  per  annum. 

From  1890  to  1900  only  1.1%  per  annum. 

From  1900  to  1902  the  roll  increased  3%  each  year. 

In  1903,  after  great  efforts  by  the  State  Board  of  Equalization  and 
slashing  increases  in  many  counties,  the  roll  reached  nearly 
$1,600,000,000.  It  dropped  back  about  $50,000,000  the  next  year,  and 
this  (1905)  year  has  gone  to  $1,625,000,000,  a  gain  of  V/Jfo  in  two 
years,  or  an  average  of  %  of  1%  per  annum  for  the  two  years. 

No  one  will  assume  that  this  represents  the  true  increase  in  the 
wealth  of  the  State  in  the  past  two  years. 

2.  When  separation  is  permitted  it  is  possible  to  place  each  tax  in 
the  hands  of  that  branch  of  the  government  which  is  best  adapted  to 
administer  it.  The  taxation  of  public-service  corporations,  for  example, 
whose  business  pervades  the  whole  State,  can  not  be  adequately  handled 
by  the  local  assessors.  In  every  case,  in  order  to  obtain  any  sort  of 
equality,  uniformity,  and  justice  in  the  treatment  of  these  great  cor- 
porations, it  is  necessary  to  call  in  the  assistance  of  a  State  board,  even 
if  the  resulting  taxes  are  distributed  among  the  localities.     This  is  one 

6— RT 


REPORT  OF  COMMISSION    ox    REVENUE   AND   TAXATION. 

of  the  several  points  at  which  the  general  property  tax  breaks  down, 
and  in  which  our  present  administrative  organization  in  California  is 
especially  weak.  If  we  have  separation  of  sources  the  State  alone  would 
deal  with  these  corporations.  This  would  save  a  great  amount  of 
friction  and  more  or  less  expense. 

The  different  classes  of  corporations  can  not  all  be  successfully  taxed 
by  one  and  the  same  method.  That  has  been  partly  recognized  in 
California  already  in  the  taxes  imposed  on  the  premiums  of  insurance 
companies.  The  local  assessors  and  other  administrative  officers, 
engaged,  as  they  necessarily  will  be,  largely  in  the  administration  of 
the  local  taxes,  can  not  safely  or  wisely  be  entrusted  with  the  adminis- 
tration of  several  other  sorts  of  taxes.  Nor  have  these  officers  in  the 
past  shown  any  ability  to  handle  the  administration  of  broader  matters 
concerning  taxation.  What  is  needed  is  separate  machinery  for  the 
administration  of  each  of  the  different  taxes. 

3.  The  different  taxing  districts  could  each  have  practical  ':home 
rule"  in  matters  relating  to  taxation.  There  would  no  longer  be  any 
object  in  underassessment  if  there  were  no  State  tax,  or  but  a  small 
one,  to  be  apportioned  to  the  counties  on  the  basis  of  the  assessment 
made  by  the  county  assessor.  If  for  any  reasons  peculiar  to  its  local 
conditions,  one  county  preferred  to  have  a  high  rate  of  assessment  and 
a  low  nominal  tax  rate  it  could  do  so  without  assuming  more  than  its 
fair  share  of  the  State  burden.  If  another  county  preferred  to  have  a 
low  assessment  and  a  high  nominal  tax  rate  it  could  do  so  without 
evading  any  portion  of  its  obligations  to  the  State.  If  for  any  reason  a 
county  preferred  to  have  its  assessment  roll  revised  once  in  several 
years  only,  it  could  do  so  without  damage  to  any  other  community  and 
with  a  considerable  saving  in  expense  to  itself.  Other  advantages  in 
this  connection  will  suggest  themselves. 

If  each  branch  of  the  government  collecting  taxes  did  so  independ- 
ently of  the  action  of  the  others  there  could  be  no  clashing  of  adverse 
interests,  and  the  administration  would  be  much  simpler  and  more 
economical. 

To  secure  uniformity  in  the  distribution  of  the  burden  and  equality 
between  different  classes  when  taxes  are  levied  by  different  authorities 
is  the  function  of  the  general  revenue  law  of  the  State. 

Separation  in  other  states. 

Many  of  the  Eastern  states  have  introduced  the  plan  for  separation 
of  State  from  local  taxation.  Pennsylvania  was  the  pioneer  in  this 
line,  and  has  had  such  a  system  in  force  for  many  years.  New  York 
has,  after  25  years  of  gradual  evolution,  attained  a  similar  position. 
We  have  selected  these  two  states,  together  with  Connecticut,  Ohio,  and 
Minnesota,  each  with  more  or  less  complete  separation,  to  illustrate  the 
w;iy  this  plan  works  in  other  states. 


REPORT  OP   COMMISSION   ON   REVENUE  AND   TAXATION.  83 

Illustrations  of  the  effects  of  the  separation  of  State  from  local  taxation 
in  certain  states. 

New  York  (1903-1904). 

Total   State  revenue  from  all  sources $29,297,435.71 

Total  revenue  from  direct  tax  on  property   (remnant  of  old  tax  for 
canals)    761,085.02 

Revenue    raised    by    corporation    taxes,    licenses,    and    miscellaneous 

indirect   taxes    $28,536,350.69 

This  sum  of  .s28,536,350.69  was  distributed  as  follows: 

Taxes  on  insurance  premiums $1,051,774.87 

Taxes   on   transportation   earnings 1,007,245.12 

Taxes  on  transportation  capital  stock 710,903.81 

Taxes  on  telegraph  and  telephone  earnings 132,779.86 

Taxes  on  miscellaneous  capital  stock 755,088.68 

Taxes  on  gas,  water,  electric  light,  etc.,  earnings 428,083.65 

Taxes  on  foreign  banks 62,341.76 

License  fees 51 ,290.42 

Taxes  on  trust  companies 1,860.876.63 

Taxes  on  savings  banks 719,535.37 

Total  taxes  on  corporations $7,033,196.99 

Tax  on  organization  of  corporations 199,680.16 

Inheritance    tax 5,428,052.48 

Fees  from  public  offices 168,339.61 

Liquor  licenses,  etc 9,147,200.04 

Fees  from  public  institutions 39,601.76 

Canal    fund.  . 3,116.665.12 

Miscellaneous   receipts 3,403,614.53 

Total $28,536,350.69 

The  tax  rates  on  corporations  for  State  revenue  only  are  as  follows : 
On  insurance  premiums,  1%  ;  on  the  gross  earnings  of  railroads  (the  gross  earnings 
resulting  only  from  business  originating  and  terminating  within  the  State),  %%;  on 
the  capital,  undivided  profits  and  surplus  of  trust  companies,  1% ;  on  undivided 
profits  and  surplus  of  savings  banks,  1%  ;  on  earnings  within  the  State  of  foreign 
banks,  5%;  gas,  water,  and  electric  light  companies  pay  %%  of  gross  earnings  in 
addition  to  3%  of  all  dividends  paid  in  excess  of  4%  on  paid-up  capital. 

All  corporations,  excepting  banks,  title  guaranty  companies,  insurance  companies, 
and  some  others,  pay  a  tax  of  %  mill  for  each  one  percentum  of  dividends  if  the 
dividends  amount  to  6%,  or  more,  on  the  capital  stock,  and  lesser  rates  for  smaller 
dividends.  These  taxes  are  not  in  lieu  of  local  property  taxes,  but  in  addition 
thereto. 

Pennsylvania  (1904). 

Total  State  revenue  from  all  sources $24,067,338.26 

State  revenue  from  general  property  tax 

Distribution   of   above   revenue — 

Tax  on  corporation  stock  and   bonds $10,589,732.59 

Tax   on   corporation   gross   income 1,186.462.32 

Tax   on   bank  stock 838,103.43 

Tax  on  insurance  premiums I.L'li.';. ...",<>. 22 

Tax  on  personal  property ;»,  l  16,906.04 

Liquor   licenses,  etc 1,702,305.83 

Bonus  on  charters 915,892  2  I 

Inheritance  tax 1,677,185.48 

Mercantile    licenses 940,567.86 

Miscellaneous    (fees,  fines,  etc.) 3,283.652.25 

Total $24,087,338.26 


B4  REPORT   OF   COMMISSION    ON    ft] A  I  M  i:   AND   TAXATION. 

Pennsylvania  leviea  a  general  tax  upon  the  total  capital  stock  of  all  corporations 
(with  certain  exceptions)  of  5  mills  per  $1.00  actual  value,  and  8  mills  per  #1.00 
on  tho  gross  receipts  of  railroads,  telegraph  and  telephone,  express,  and  electric 
light  companies.     Banks  pay.  however,  at  the  rate  of  4  mills  per  $1.00  of  capita] 

plus  surplus  and  undivided  profits,  with  the  option  of  paying  10  mills  (1%)  on 
the  par  value  of  all  its  shares,  and  paying  the  same  in  lieu  of  local  taxation,  except 
on  real  estate.  Outside  insurance  companies  pay  -%  of  their  total  premiums,  while 
local  companies  pay  at  the  rate  of  8  mills  upon  the  $1.00  of  their  gross  premiums 
and  assessments.  The  State  also  levies  a  tax  of  4  mills  per  $1.00  of  valuation 
upon  certain  classes  of  intangible  personal  property,  such  as  mortgages,  money 
owed  by  solvent  debtors,  articles  of  agreement  and  accounts  bearing  interest,  public 
land,  etc.,  and  vehicles  used  for  hire.  Corporations  also  pay  %%  on  capital  slock  as 
a  bonus  on  their  charters,  which  is  the  price  paid  for  the  privilege  conferred  by 
the  charter. 

Connecticut  (  1904). 

Total   State  receipts,  all  sources >3,318.889.19 

No  general  property  tax  for  State  revenue. 

Summary  of  Receipts. 

Railroad   and   corporation   taxes $1,372,089.52 

Inheritance   taxes 265,780.92 

Fees  and  licenses 10,928.35 

Tax  on  investments 142.005.33 

Savings     banks 44S.3S3.07 

Telegraph  and  telephone 25,817.14 

Insurance   companies 313,682.57 

Military   commutation   tax 151,220.00 

Insurance   Commissioner   receipts .  122,925. 15 

Miscellaneous  receipts 166,048.14 

Total $3,318,889.19 

Connecticut  collects  a  tax  of  1%  on  the  capital  stock  and  funded  and  floating 
indebtedness  of  railroads  and  street  railways.  This  tax  is  in  lieu  of  all  other  taxes 
excepting  non-operative  real  estate,  which  is  taxed  locally,  and  is  deducted  from  the 
above  valuation.  Express  companies  pay  ."">','  of  their  gross  earnings,  which  is  in 
lieu  of  all  other  taxes  on  their  operative  property.  Telegraph  and  telephone  com- 
panies pay  25c  on  each  mile  of  wire  operated  within  the  State.  Telephone  companies 
pay   in  addition  70c  on  each  telephone  transmitter.     These  taxes  are  in  lieu  of  all 

Other    taxes. 

Savings  banks  pay  %%  of  the  balance  of  their  deposits,  exclusive  of  surplus  over 
$50,000,  and  over  the  amount  invested  in  municipal  or  State  bonds  of  the  common- 
wealth in  the  stock  of  banks,  trust  or  insurance  companies.  Every  male  between 
the  ages  of  18  and  45  pays  an  annual  tax  of  $2  in  commutation  of  military  duty. 

Ohio  (1904). 

Total  State  receipts  from  all  sources $8,427,878.15 

Property   tax,  general   duplicate,   State  revenue 29,251.78 

!;■    enue   from   other   sources SS..".!)S,ti2(>.37 

Summary. 

Liquor    traffic    taxes $1,271,537.16 

i   tcise    taxes 1,646,087.78 

Corporation    fees PI  1,023.36 

Insurance  fees  and  taxes 1,046,211.93 

inheritance  taxes   (repealed  in   1905) 78,208.79 

Scl I   tax    (property   tax) 1,973,529.86 

Sinking   fund   receipts 387,354.23 

University  fund   (property  tax) 455,300.23 

Miscellaneous    626,378.53 

Total $8,398,020.37 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 


85 


Ohio  has  a  system  of  revenues  in  which  the  schools  and  university  are  supported 
by  a  general  property  tax,  and  the  general  revenue  of  the  State  is  supplemented  to 
a  slight  degree  by  the  same  method.  This  general  properly  tax  for  State  purposes 
is  very  small,  being  S93.2G0  in  1902,  and  as  seen  from  the  above,  only  $29,251.78  in 
1903.  All  corporations  are  taxed  locally  under  the  general  property  tax.  but  rail- 
roads, electric  light,  gas,  water  works,  street  railroads,  etc.,  pay  in  addition  %% 
of  their  gross  earnings  to  the  State;  express  companies  pay  2%  of  their  gross 
earnings,  less  what  is  paid  for  transportation  of  freight. 

Insurance  companies  pay  to  the  State  a  percentage  on  gross  premiums  not  under 
2%%.      Liquor   dealers   pay   $350   per   annum. 

Minnesota  (1904). 

Total   receipts  from  all   sources $8,737,325.09 

General  property  tax $880,292.88 

Property   tax,   school  and   university 759,480.13       1,639,773.01 

Revenue  from  other  sources $7,117,55—08 

Summary. 
Railroads    ' ^I^nS 

Telegraph  and  telephones o9,3o0.84 

°70  7S7  37 
Insurance   companies _iu.ioi..ji 

Express  companies _o,<3b4.o7 

Sleeping  cars,  freight  lines,  vessel  tonnage ^18,016.13 

Departmental    earnings,    fees,    etc L,567,478.37 

State    institutions 1 . 1 s  1  ■'  [25.84 

Miscellaneous     2,020.9oS..  < 

Total $7,117,552.08 

Minnesota  has  a  general  property  tax  yielding  $1,639,773  in  1904,  a  gross  earnings 
tax  on  public  service  corporations  and  an  inheritance  tax  with  the  usual  sources  of 
income  from  fees,  licenses,  land,  etc. 

Railroads  pay  a  gross  earnings  tax,  in  lieu  of  all  other  taxes  on  operative  property, 
at  the  rate  of  4%  per  annum. 

Sleeping  ear  companies,  freight  lines,  etc.,  pay  at  the  rate  of  3%  on  gross 
earnings:  express  companies  6%;  telephone  companies  3%,  and  insurance  companies 
2%  on  the  gross  premiums  received  in  the  State,  the  latter  also  paying  a  prop- 
erty   tax. 


M.  REPORT   OF   COMMISSION   ON    REVENUE   AND   TAXATION. 


CHAPTER  II. 

SEPARATION  IN  CALIFORNIA. 


Recommendation. 

The  Commission  recommends  that  California  shall,  as  soon  as  possi- 
ble, enter  on  the  pathway  of  tax  reform  that  has  been  trodden  by  the 
great  states  whose  finances  have  been  reviewed  in  the  preceding  chapter. 
Since  the  now  antiquated  system  of  taxation  was  adopted,  in  1849, 
California  has  made  great  progress  in  economic  development.  She  is 
no  longer  primarily  a  mining  and  agricultural  State.  In  1905  her 
manufactures  amounted  to  $367,000,000,  her  commerce  has  assumed 
large  proportions,  and  her  systems  of  transportation  and  communica- 
tion have  grown  apace.  The  primitive  conditions  to  which  the  old 
general  property  tax  was  suited  have  passed  away  forever,  and  the  pre- 
vailing conditions  are  substantially  the  same  as  those  of  the  states  on 
the  Atlantic  side  of  the  country.  The  same  difficulties  which  led  the 
Eastern  states  to  change  their  system  of  taxation  have  developed  in 
California.  The  same  remedies  which  those  states  have  found  to  be 
effective  should  be  helpful  here. 

The  detailed  recommendations  as  to  the  form  of  separation  have  been 
set  forth  in  the  first  part  of  this  report,  They  may  be  summarized 
again  in  this  connection.  As  a  first  step:  separate  State  from  local  tax- 
ation. Reserve  for  the  State  the  exclusive  right  to  tax  railroads,  express, 
car,  light,  heat  and  power,  telephone  and  telegraph  companies,  all  fran- 
chises, hanks,  and  insurance  companies.  Let  the  old  tax  system,  except 
as  applied  to  the  above  classes  of  corporations,  be  continued  solely  as  a 
system  of  local  taxation.  Aim  at  complete  separation  as  soon  aspo>-i- 
ble,  but,  pending  the  complete  realization  of  the  plan,  and  the  develop- 
ment of  State  revenues  under  the  new  system,  continue  the  old  State 
tax  on  L'eneral  property,  for  school  purpose*  only. 

At  present  the  State  gives  nearly  half  its  revenues  to  the  schools.  If 
the  rev  imes  from  the  new  sources  are  not  sufficient  for  this  and  all 
other  legitimate  purposes  as  well,  continue  the  old  system,  as  far  as  may 
be  needed  to  m:ike  good  school  moneys.  Even  Wisconsin,  which  has 
recently  announced  that  she  is  a  "taxless  State,"  continued  her  one 

mill   tax  ( l<i  cents lach  $100  of  assessed  valuation)  for  schools  until 

this  year  (  L906).     A  small  State  tax  on  property  in  general, for  schools, 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  87 

would  not  vitiate  the  advantages  of  the  new  system.  A  ten-cent  tax 
would  be  more  than  ample,  and  that  does  not  offer  a  sufficient  induce- 
ment to  undervaluation. 

Summary  of  the  estimated  effects  of  separation. 

If  complete  separation  of  State  from  local  taxation,  according  to  the 
plan  proposed  by  this  Commission,  had  been  in  operation  in  1905  it 
would  have  saved  the  taxpayers  in  the  counties -meaning  thereby 
those  taxpayers  who  would  remain  on  the  county  rolls  as  local  taxpayers 

$4,285,118.01. 

It  would  have  saved  the  owners  of  real  estate  $3,620,924.71. 
It  would  have  reduced  the  average  tax  rate  by  29.75  cents. 
Partial  separation  would  have  worked  proportional  results. 

How  the  effects  are  computed. 

With  complete  separation  of  State  from  local  taxation  there  would  be 
no  State  tax  levied  on  the  general  assessment  roll  of  the  counties.  The 
owners  of  real  estate  and  of  tangible  personal  property  would  be  taxed 
for  county  and  local  purposes  only.  The  local  taxpayers  would,  there- 
fore, make  a  gross  saving  of  the  entire  amount  of  the  State  tax.  The 
State  tax  in  1905  was  at  the  rate  of  49  cents  on  each  $100  of  assessed 
valuation  of  property. 

But  under  the  plan  proposed  by  the  Commission  this  would  not  all 
be  clear  gain,  because  the  property  of  the  public-service  corporations 
selected  for  State  taxation  would  no  longer  be  subject  to  county,  city, 
or  other  local  taxation.  The  counties  and  respectively  the  cities, 
school  districts,  etc.,  therefore,  would  lose  certain  revenues  which  they 
now  have  and  which  would  have  to  be  made  good  by  increased  taxes 
on  the  property  remaining  on  the  tax  rolls.  Thus,  for  the  State  at  large, 
the  total  State  taxes  in  1905  amounted  to  $7,962,459.63,  which  would 
be  the  gross  saving  made  by  the  counties  if  the  entire  State  tax  were 
abolished.  But  the  public-service  corporations  were  paying  in  taxes, 
all  told,  $3,677,341.62,  so  that  the  net  saving  to  the  counties  would  have 
been  $7,962,459.63  less  $3,677,341.62,  or  $4,285,118.01.  This  would  have 
made,  had  it  been  uniformly  distributed  over  the  State,  a  reduction  in 
the  tax  rate  of  29.75  cents.  But  the  railroads,  the  public-service  cor- 
porations, the  banks,  and  the  like,  are  not  uniformly  and  evenly  dis- 
tributed among  the  counties,  so  that  the  saving  made  in  the  Beveral 
counties  varies  according  as  they  have  many  or  few  of  such  corporations 
within  their  boundaries.  Thus,  for  example,  Alpine  County,  which  has 
no  public-service  corporations,  would  save  the  entire  State  tax  of  49 
cents  in  its  tax  rate,  while  Siskiyou  County,  which  has  relatively  long 
stretches  of  railroads  within  its  boundaries,  would  save  only  2\  cents. 
Placer,  San  Bernardino,  Ventura,  and  Yuba  would  actually  lose  by  the 


REPORT   OF   COMMISSION   ON    REVENUE   AND  TAXATION. 

change,  their  tax  rates  being  Increased.  The  loss  Ln  Ventura  is  very 
slight,  practically  nothing.  These  Losses  are  «lu«-  to  the  fad  that  in 
these  counties  there  is  a  relatively  Large  amounl  of  property  belonging  to 
public-service  corporations  which  would  be  taken  from  the  rolls.  It  is 
argued  elsewhere  in  this  Report  that  neither  these  nor  any  other  counties 
have  any  proper  claim  to  the  revenues  derived  from  the  taxation  of 
such  public-service  corporations,  and  that  the  revenues  they  have  been 
collecting  in  the  past  from  this  source  did  not  properly  belong  to  them. 
It  mighl  further  be  pointed  out  that  by  the  gerrymandering  of  the 
Bchool,  Irrigation,  ami  other  districts  along  the  line  of  the  railroads  (the 
so-called  "'shoestring  district-"),  ami  by  other  devices,  some  of  these 
counties  have  heen  imposing  an  undue  proportion  of  their  loeal  taxes 
upon  the  puhlic-service  corporations. 

Separation  for  the  common  good. 

[n  adjusting  the  gross  inequalities  which  now  exist  in  our  revenue 
Bystem  it  was  to  he  expected  that  those  portions  of  tin-  State  which 
benefited  by  the  existing  inequalities  would  suffer  by  any  reform,  and 
it  iiiav  lie  urued  that  inasmuch  as  fifty-three  out  of  the  fifty-seven 
counties  henefit  materially  by  the  change  and  only  four  suffer,  or 
appear  t<»  suffer,  the  change  is  really  for  the  common  good.  The  lo- 
in Ventura  is  so  slight.  .7  of  one  per  cent,  that  she  might  be  considered 
as  being  unaffected.  Virtually,  then,  only  three  counties  would  be 
loser-. 

As  the  over-taxation  of  real  estate  is  far  and  away  the  very  worst 
evil  in  our  present  system,  the  Commission  feels  particularly  gratified 
that  it  has  been  aide  to  devise  a  plan  which  will  afford  this  class  of  tax- 
payers so  substantial  a  relief. 

Discussion  of  table  showing-  gain  or  loss  by  counties. 

The  following  table  shows  the  gain  or  loss  in  each  county,  the  effect 
on  the  tux  rate,  and  the  percentage  of  the  property  of  public-service 
corporations  to  the  total  assessed  valuation  in  each  county. 

This  table  represents  the  results  of  a  very  considerable  part  of  the 
Commission's  work.  The  data  have  been  collected  from  the  different 
as><  --•>]-,  from  the  corporation-  themselves,  ami  have  heen  verified  and 
checked  in  every  possible  way.  Some  idea  of  the  extent  of  the  data 
collected,  of  which  the  accompanying  table  is  hut  a  brief  condensation, 
may  be  gained  from  the  statement  that  the  tabulations  alone  cover  34 
sheets  of  paper,  15  by  32  inches.  As  fast  as  compiled  and  analyzed,  the 
figures  in  full  for  each  county  were  sent  hack  to  the  assessors  for  verifi- 
cation. Sometimes  they  had  to  he  sent  hack  repeatedly  hefore  various 
differences  between  the  different  report-  could  he  reconciled.  But 
before  they  were  finally  accepted,  the  Commission  obtained  the  assur- 


REPORT   OF   COMMISSION    ON    REVENUE    AND   TAXATION. 


89 


ance  of  the  assessors  that  they  were  substantially  correct.  It  is  possil  >le 
that  the  figures  may  still  contain  some  errors,  but  every  error  which 
could  be  located  or  suspected  has  Keen  eliminated. 

THE  GAIN  (OR  LOSS)  TO  EACH  COUNTY  BY  SEPARATION. 


County. 


Alameda  

Alpine... 

Amador 

Butte 

Calaveras 

Colusa  

Contra  Costa 

Del  Norte 

El  Dorado 

Fresno 

Glenn .. 

Humboldt 

Inyo 

Kern   

Kings 

Lake.. 

Lassen.. 

Los  Angeles 

Madera 

Marin 

Mariposa 

Mendocino 

Merced 

Modoc 

Mono 

Monterey 

Napa 

Nevada 

Orange 

Placer 

Plumas 

Riverside  

Sacramento 

San  Benito 

San  Bernardino  . 

Sen  Diego 

San  Francisco  ... 

San  Joaquin 

San  Luis  Obispo. 

San  Mateo 

Santa  Barbara ... 
Santa  Clara 

Santa  Cruz 

Shasta 

Sierra    

Siskiyou 

Solano :.  . 

Sonoma    

Stanislaus 

Sutter 

Tehama 

Trinity 

Tulare 

Tuolumne 

Ventura 

Yolo 

Yuba -. 


Total  State 
Taxes  of 
County. 


State,  City, 

and  County 

Taxes  of 

Public-Service 

Corporations. 


S57 1.553  51 

2.2115  09 

26,659  15 

29,818  46 

60,205  36 

107,120  43 
15,725  15 
24,321  22 

189,338  37 
52,063  94 

121,638  09 
12,774  49 

123,160  50 
40,8.V.  94 
16,306  54 
27,436  L9 
1,139,792  69 
36,448  07 
69,242  50 
11.063  57 
60,651  14 
74.7H7  33 
21,859  92 
6,053  80 
95,486  48 
67,398  28 
36,115  47 
72,728  20 
47,946  54 
20,668  42 
76,883  94 

182,185  05 
31,668  40 

105,720  89 

112.661  33 
2,569,489  77 

181,016  32 

71,117  64 

781  31 

95,068  50 

278,627  ol 
64,476  75 
59,115  39 
10,315  41 
60,31'.'  65 
93,212  63 

154,822  53 
70,051  24 
32,282  35 
58,7' 

11,132  27 
90,422  68 
II  01 
50,8'. '7  92 
81,808  30 
29,569  71 


$359,938  54 

none 

9,413  94 

4O.709  69 

9,45!  1  89 

1.2,873  18 

39.759  21 

528  93 

17,113  29 

81,286  52 

16,682  25 

25,703  23 

4.235  64 

!io.s:;ii  7:; 

17,597  93 

928  00 

5,377  16 

522,523  60 

31,557  39 

25,014  21 

7,783  23 
16,311  69 
43.759  35 

1,202  86 

2,162  47 
411,572  HL 
17.284  65 
2H.763  48 
31,245  85 
58,567  13 

2,339  88 

63,136  37 

107,156  00 

7,636  34 
168,548  66 
79,423  14 
954,454  41 
S3. 21 17  37 
31,274  12 
16,822  08 
16.298  05 
53,078  17 
30,833  06 
45,651  18 

5,162  38 
58,642  38 
27,102  25 
61,870  07 
40,240  61 
10,4  lit  lit 
25,21)9  .vt 

1,000  09 
60.391  it:; 
13.5<;ti  87 
51.51  Hi  7f. 

671  itl 
39,707  41 


Difference: 

Giving  Net 

Gain  or  Loss 

of  County. 


Gain  or  Loss 
in  Tax  Rate 
of  County. 


$211,614  97 

2.295  09 

17.215  21 

42,271  26 

20,358  57 

47,332  18 

67,361  22 

15,196  22 

7,207  93 

108,051  85 

35,381  69 

95,934  86 

8,5:38  85 

32,320  77 

23,258  01 

15,378  54 

22,059  03 

617,269  09 

4.890  68 
44,228  29 

3,280  34 
44.339  45 
31,037  98 
20,657  06 

3.891  33 
45,913  87 
50,113  63 

6,351  99 

41,482  35 

!Loss  10,620  59 

18,328  54 

13,747  57 

75,029  05 

24,032  06 

Loss 62,827  77 

33,238  19 

1,615,035  36 

97,718  95 

39,843  52 

72,959  23 

48,770  45 

225,548  87 

33,643  69 

1.3,464  21 

5,153  03 

1,667  27 

Hii.llO  38 

92,952  it; 

29,810  63 

21,862  B6 

3  ■:■: 

10,132  In 
.•,2.409  38 
22,983  It 

Loss  698  84 
56,136  36 

Loss  10,137  70 


20.58 
49.00 
34.63 
27.90 
35.50 
40.91 
34.7.. 
47.73 
16.86 
31.46 
36.18 
40.94 
35.22 
16.21 
31.14 
46.71 
41.23 
29.69 

7.986 
34.61 
16.83 
38.32 
23.83 
47.12 
34.15 
27.16 
39.14 
10.13 
31.46 

Loss  14.86 
44.69 
10.82 
22.37 
39.41 

Loss  46.13 
16.81 
34.60 
29.89 
30.72 
41.50 
28.52 
11.67 
27.1 17 
13.76 
2tl.5t  t 

2.358 

37.59 
32.38 

24.15 

30.67 
45.37 
21.30 

33.50 
Loss  0.7 

37.02 
Loss  2".. 54 


Percent: 

of  Assessed 

Valuation 

Takes  Away 

to  Total 

Ass.  • 

Valuation. 


Totals $7,962,459  63    $3,677,341  62    $4,285,118  01 


11.86 

~8"46 

10.54 

5.76 

5.85 

11.31 

.79 

13.85 

11.12 

7.96 

5.60 

7.00 

2.06 

10.44 

1.05 

4.45 

10.61 

17.68 

lt.57 

13.68 

6.53 

14.69 

1.74 

7.78 

13.25 

6.91 

14.96 

11.16 

26.94 

2.77 

19.04 

9.80 

5.62 

36.94 

14.00 

10.99 

11.50 

HO  13 

4.08 

11.88 

4. so 

8.60 

18.91 

7.6:; 

2S.47 

7.54 

H.14 

13.66 

lu.  15 

11.-7 

L6.93 

17.. 56 

8.07 

17.56 

9.19 

18.21 

11.35 


DO  EUSPOBT  OF   COMMISSION  ON   REVENUE   AND   TAXATION. 

In  one  sense  the  tables  are  to  be  regarded  as  illustrative  merely;  that 
is,  they  represent  the  effect  of  the  rmiijilrh  separation  of  State  from  local 
taxation  in  l'->t>~>  <>nh/.  Inasmuch  as  the  State  tax  levy  for  1906  i- 
about  a  million  dollars  Lees  than  for  L905,  there  would  l>e  (juite  a  reduc- 
tion in  the  figures  representing  the  saving  for  that  year,  while  in  other 
years,  with  a  higher  tax  rate  for  State  purposes,  the  saving  would  be 
proportionately  greater. 

Kven  if  there  were  no  financial  train  accruing  to  the  counties,  there 
would  still  be  sufficient  advantage  resulting  from  the  separation  of 
State  from  local  taxation,  from  the  establishment  of  home  rule  in  local 
taxation,  and  from  the  establishment  of  greater  equality,  to  make  it 
well  worth  while  to  adopt  the  plan  of  separation. 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  91 


CHAPTER  III. 

GROSS  EARNINGS  TAX  IN  THEORY  AND  PRACTICE. 


Gross  earnings  taxes  recommended. 

The  Commission  recommends  that  the  taxes  to  be  levied  on  public- 
service  corporations  shall  be  in  proportion  to  gross  earnings.  The 
reasons  for  this  recommendation  must  be  made  clear,  for  a  large  part 
of  the  plan  of  reform  depends  upon  them. 

It  is  furthermore  certain  that,  as  this  is  an  innovation  in  California, 
many  persons  will  desire  to  satisfy  themselves  as  to  whether  the  rates 
recommended  for  taxes  to  be  levied  in  proportion  to  gross  earnings  are 
just  and  fair  compared  with  other  taxes. 

It  is  the  purpose  of  this  chapter  to  bring  these  matters  together. 

Theory  demands  net  earnings  tax. 

Theoretically  all  taxes,  by  whatever  method  they  may  be  levied, 
should  be  apportioned  among  the  taxpayers  of  every  class  according  to 
net  income.  Theoretical  writers  on  taxation  have  never  advanced 
beyond  the  idea  embodied  in  Adam  Smith's  famous  dictum:  'The 
subjects  of  every  State  ought  to  contribute  toward  the  support  of  the 
government,  as  nearly  as  possible,  *  *  *  in  proportion  to  the 
revenues  which  they  respectively  enjoy  under  the  protection  of  the 
State." 

Practical  difficulties  of  net  earnings  tax  are  insuperable. 

But  practically  it  has  proven  impossible,  without  resorting  to  methods 
too  inquisitorial  to  be  consonant  with  that  freedom  of  the  individual, 
which  is  so  jealously  guarded  under  our  system  of  government,  to 
ascertain  the  net  income  of  individuals  for  the  purpose  of  levying 
taxes  thereon. 

There  are  two  possible  good  substitutes  for  the  theoretically  good  but 
practically  unworkable  tax  on  net  income.  One  is  a  tax  on  the  prop- 
erty, the  other  a  tax  on  gross  earnings.  We  know  by  bitter  experience 
that  the  tax  on  property  fails,  especially  where  large  corporate  interests 
are  affected.  A  tax  on  the  gross  earnings,  at  rates  for  the  different 
classes  of  corporations  which  recognize  in  a  broad  general  way  the 
differences  in  the  proportion  of  net  earnings  therein,  is  the  substitute 
recommended  by  this  Commission,  in  certain  cases  in  which  it  seems  to 
be  practicable  and  equitable. 


92  REPORT   OF   COMMISSION   ON    REVENUE    Wl>   TAXATION. 

The  justice  and  equality  of  a  gross  earnings  tax. 

It  i>  not  claimed  thai  the  gross  earnings  tax  will  be  absolutely  just 
and  equitable  in  its  effect  upon  each  corporation  in  each  of  the  different 
classes.  No  tax  system  has  ever  been  devised  which  is  strictly  just.  But 
it  is  claimed  that  in  certain  cases  such  a  tax  would  result  in  a  far  do 
approximation  to  justice  and  equality  than  anyother  tax  which  thisStati 
Id  select.  The  burden  of  taxation  imposed  thereby  will  vary  from 
year  to  year  as  the  fund  oul  of  which  the  taxes  must  be  paid  varies. 
A  careful  examination  of  the  effecl  of  the  taxes,  at  the  rate-  proposed, 
upon  the  individual  corporation e  shows  that  the  differences  are  prac- 
tically unimportant. 

The  very  able  Ontario  Commission  on  Railway  Taxation,  which 
reported  in  1905,  Bays: 

Finding,  then,  that  the  gross  earnings  tax  would  cause  no  substantia]  inequality  in 
the  case  <>f  the  roads  operating  in  Ontario,  and  that,  as  regards  equality,  there  is  little 
to  choose  bet  ween  taxing  on  the  gross  and  on  the  net  earnings  basis,  the  choice  between 
.  might  very  weU  be  determined  on  the  ground  of  Eacilityand  certainty  in  ascer- 
taining what  is  gross  and  what  is  net  revenue.  But  there  is  very  Little  difficulty  and 
dispute  in  determining  what  is  gross  revenue,  while  there  is  endless  difficulty  and 
dispute  in  determining  what  is  Del  revenue,  especially  where  it  is  to  the  interests  of  the 
companies  to  minimize  net  revenue  in  order  to  escape  taxation.  Hence,  there  would 
seem  to  be  no  hesitation  in  selecting  gross  revenue  as  the  simplest  and  most  direct,  and, 
considering  all  the  roads,  the  most  equitable  basis  For  taxation. 

The  essentia]  fairness  of  taking  earnings  as  a  basis  for  the  taxation  of  corporations  is 
based  on  the  general  principle  that  the  taxe-  vary  witli  the  capacity  of  the  company  to 
pay  them,  whereas  taxation  on  the  basis  of  general  property  results  in  all  manner  of 
inequality.  The  amount  of  tangible  property  required  by  the  various  corporations  ha-. 
in  the  firsl  place,  no  necessary  relation  to  their  relative  earning  power,  and,  in  the  second 
place,  bears  no  accurate  relation  to  the  earning  power  of  the  same  company  at  different 
periods.  The  capital  stock  tax  has  something  of  the  same  defecl  in  addition  to  those 
already  mentioned,  yet  it  ha-  a  certain  amount  of  flexibility.  Only  the  tax  on  earnings 
follows  automatically  the  capacity  of  the  corporation  to  pay,  and  while  even  it  has  its 
inequalities,  yel  it  is  very  much  more  equitable  than  any  other  practical  Bystem. 


Practical  advantage  of  a  gross  earnings  tax. 

Taxation  is  of  necessity  largely  a  matter  of  expediency,  and  practical 
considerations  naturally  outweigh  theoretical  ones.  The  advantages  of 
:i  gross  earnings  tax  on  public-service  corporations  are  largely  practical. 
They  are:  (1)  Certainty  ami  ease  of  administration.  Gross  earnings 
can  !'<•  concealed  or  misrepresented  only  by  outright  and  easily  detected 
fraud.  Unlike  property  values  or  net  earnings  they  are  not  affected 
by  difference-  of  opinion  and  depend  on  nobody's  judgment  or  discre- 
tion. They  are  often  a  matter  of  ] mi  1  >1  i s  1 1 «  1 1  record.  After  the  gross 
earnings  are  determined  the  rest  is  a  matter  of  mere  arithmetical 
computation.  (-J)  They  follow  the  capacity  of  the  taxed  suhject  to 
pay.  (:;  i  They  inter  every  year  in  the  same  proportion  into  the 
account-  and  can   he  computed  in   advance.     (4)   They  are  less  likely 


REPORT  OF   COMMISSION  ON   REVENUE   AND   TAXATION.  93 

to  be  shifted  from  the  taxpayer  to  some  one  else  than  any  other  tax. 
(5)  In  the  words  of  the  Ontario  Commission  above  referred  to: 

One  of  the  most  important  advantages  of  the  gross  earnings  tax  Is  thai  it  does 
away  with  the  difficulty  about  the  taxation  of  franchises.  Probably  no  aspect  of  modern 
economic  wealth  has  given  rise  to  such  elaborated  and  confused  discussion  and  even 
outlandish  theorizing  as  the  so-called  "franchise"  values.  Without  attempting  to 
follow  the  lines  of  popular  discussion  on  the  subject,  it  may  be  sufficient  lure  to  indi- 
cate briefly  that  there  are  two  distinct  senses  in  which  the  term  "franchise"  is  used 
to  indicate  a  property  or  economic  value.  It  is  the  confusion  of  these  two  economic 
phrases,  with  the  occasional  introduction  of  purely  legal  aspects  of  franchise,  which  has 
contributed  so  much  to  the  darkening  of  counsel  on  the  subject. 

How  to  Determine  the  Rates  for  Gross  Earnings'  Taxes  on  the 
Different  Classes  of  Corporations. 

Equal  taxation. 

In  all  of  those  states  in  which,  in  recent  years,  a  change  has  been 
made  in  the  taxation  of  public-service  corporations,  either  from  the  ad 
valorem  system  to  a  gross  earnings  tax,  or  from  a  gross  earnings  tax 
back  to  an  ad  valorem  system,  or  in  which  any  substantial  change  or 
reform  has  been  suggested  in  regard  to  the  taxation  of  public-service 
corporations,  the  question  has  always  been  raised  whether  the  proposed 
rates  or  methods  of  taxation  for  such  companies  would  result  in  "equal 
taxation."  It  is  difficult  to  determine  exactly  what  is  meant,  in  this 
connection,  by  ''equal  taxation,"  but  in  the  popular  mind,  as  expressed 
during  the  discussions  of  such  proposed  reforms,  there  has  been  an  idea 
that,  by  whatever  method  a  railroad,  for  example,  may  be  taxed,  the 
burden  of  taxation  thereon  should  be,  and  must  be,  as  heavy  as  that 
which  is  borne  by  a  farmer  or  by  an  owner  of  real  estate  and  personal 
property  on  the  regular  assessment  rolls.  The  idea  seems  to  be  that  if 
the  tax  is  levied  upon  the  gross  earnings,  it  must  result  in  the  imposi- 
tion upon  a  railroad  or  other  public-service  corporation  of  a  burden 
fairly  equal  to  that  which  it  would  bear  if  fully  assessed  on  an  ad 
valorem  basis  as  any  other  property  might  be. 

In  view  of  the  strength  of  the  popular  feeling  that  taxes  should  be 
"equal,"  and  of  the  obvious  and  essential  justice  of  such  a  demand,  it 
is  highly  important  to  discover  a  practical  method  for  determining 
whether  the  burden  of  a  tax  which  it  is  proposed  to  impose  upon  the 
gross  earnings  of  a  given  class  of  corporations  is  the  equivalent  or  not 
of  a  tax  which  might  be  levied  under  an  ad  valorem  plan.  Such  a 
method  has  been  devised  by  this  Commission.  By  the  application  of 
this  method  we  can  ascertain  what  rate  of  tax  on  the  gross  earnings  is 
the  equivalent  of  a  given  tax  rate  on  the  property,  and  <■;,■,  versa. 
This  will  make  it  possible  to  compare  any  proposed  gross  earnings  tax 
with  an  assumed  "fair"  rate  on  property. 


!»4  REPOBT   OK   COMMISSION   ON   REVENUE   AND   TAXATION. 

Brietly  stated  that  method  is:  To  determine  what  tax  rate  on  gross 
earnings  is  tin-  equivalenl  of  a  >:iven  rate  on  the  property,  for  a  given 
class  of  public-service  corporations,  (1)  ascertain  what  percentage  of 
the  gross  earnings  is  net,  (2)  ascertain  what  rate  of  interest  would 
Constitute  a  fair  return  to  investors  in  the  securities  of  the  class  of 
public-service  corporations  under  consideration,  then  (3)  divide  the  per- 
centage  of  net  earnings  by  the  rate  of  interest  and  multiply  the  result 
by  the  given  tax  rate  on  property.*  This  method  is  not  as  rigid  or  as 
infallibU  as  '/<<■  mathematical  8taU  ment  of  it  might  seem  to  imply.     Th 

till  room  for  difference  of  opinion.  But  it  has  been  found  of  great 
practical  value  in  testing  the  probable  effect  of  different  rates  on  any 
set  of  assumptions. 

Classification  of  corporations. 

The  first  step  in  tlie  application  of  this  method  by  the  Commission 
was  the  determination  of  the  class  to  which  a  corporation  belongs  by 
virtue  of  the  percentage  which  its  net  earnings  bears  to  its  total  gross 
earnings.  An  examination  of  the  accounts  of  different  classes  of  public- 
service  corporations  showed  that  they  fall  into  very  distinct  classes 
according  to  the  percentage  which  their  net  earnings  bear  to  their  gross 
earnings.  This  does  not  mean  that  every  company  belonging  to  a  given 
class  has  the  same  percentage  of  net  earnings  to  gross.  But  merely 
that  each  of  the  great  classes  ([(public-service  corporation*  presents  <>  >!//»' 
to  which  the  individual  companies  tend  to  conform,  and  from  which 
they  differ  only  while  young  or  while  for  some  other  reason  incomplete 
or  imperfect. 

Thus,  for  example,  we  found  that  railroad  companies,  opera  ting  steam 
railroad.-,  normally  pay  about  64%  of  their  gross  earnings  for  operating 
expenses,  Leaving  36%  to  pay  interest  upon  bonded  indebted- 
ness, dividends  upon  capital,  and  similar  items.  That  is,  out  of  every 
$100  received.  $0-4  goes  to  pay  for  wages,  fuel,  maintenance  of  way  and 
equipment,  and  other  items  of  cost  involved  in  operation,  and  .$.'56  is 
left  for  payment  of  interest  on  bonds,  dividends  on  Btock,  and  similar 
items.  It  i-  this  $36  which  gives  value  to  the  property.  For  fifteen 
vein-  this  average  rate  had  not  varied  in  the  I'nited  States  as  a  whole 
more  than  two  points.  City  water  companies,  to  take  another  example, 
ordinarily  have  a  very  much  lower  percentage  of  operating  expenses, 
often  as  low  as  25  .  and  consequently  have  as  high  as  75  net  earn- 
ings, or  funds  available  for  the  payment  of  interest  and  dividend-. 
Other  classes  of  corporations  again,  such  as  the  telephone  companies 
and  express   companies,  have   relatively  high  operating  expenses  and 

•Expressed  algebraically,  let  t  equal  tin-  tax  rate  Bought,  n  equal  the  percentage  of 
ii.  i  earnings  to  gross,  i  equal  the  LntereBl  rate-  on  the  investment,  and  r  equal  the  given 

71 

tax  rate  on  property;  then:  t  =    j    X  r. 


REPORT   OF   COMMISSION   ON   REVENUE  AND   TAXATION.  95 

only  a  small  proportion  of  net  revenues.  As  it  is  the  amount  of  net 
revenue  which  determines  the  value  of  the  property  of  these  corpora- 
tions as  of  any  other  property,  so  on  the  well-known  principle  of  "cap- 
italizing" the  income  at  a  predetermined  or  agreed  rate  of  interest, 
it  will  readily  be  seen  that  a  corporation  with  net  returns  large  in  pro- 
portion to  its  gross  earnings  has  a  larger  property  or  capital  value  than 
one  with  a  smaller  percentage  of  net  earnings.  For  example,  as  has 
been  said,  railroads  earn  about  36%  net  out  of  all  receipts,  and  if  this 
were  capitalized  at  6%  would  have  $600  of  capital  for  every  $100  of 
gross  earnings;  another  class  of  corporations  earning,  say,  24%  net, 
would,  if  capitalized  at  6%,  have  $400  worth  of  property  for  every  $100 
of  gross  income,  while  a  city  water  company  with  60%  net,  if  capitalized 
at  6%,  would  have  $1,000  worth  of  property  for  every  $100  of  gross 
income.  If,  however,  8%  be  taken  as  the  rate  of  interest  constituting  a 
fair  return  to  be  allowed  the  stock  and  bond  holders  upon  their  invest- 
ment, and  as  the  basis  for  capitalization,  these  sums  would  change,  and 
railroads  with  36%  net  would  have  $450  of  capital  for  every  $100  of 
gross  earnings;  a  company  with  24%  net  would  have  $300  of 
capital  for  every  $100  of  gross  earnings,  and  a  water  company  with  60% 
net  would  have  $750  for  every  $100  of  gross  earnings. 

Computing'  the  tax  rate. 

In  order  to  compute  what  rate  of  taxation  on  gross  earnings  is  the 
equivalent  of  a  given  rate  of  taxation  on  the  property,  we  have  simply 
to  divide  the  percentage  of  net  earnings  by  the  assumed  rate  of  capitali- 
zation and  multiply  the  result  by  whatever  tax  rate  on  the  property  we 
wish  to  compare  the  gross  earnings  rate  with.  Thus,  for  example,  if  we 
wish  to  impose,  in  the  form  of  a  gross  earnings  tax,  a  burden  which 
shall  be  the  equivalent  of  a  tax  of  U%  on  the  property,  then  in  the  case 
of  a  railroad,  taking  the  figures  assessed  above,  we  divide  36  by  6  or  8, 
whichever  shall  be  determined  upon  as  a  fair  rate  at  which  to  capitalize 
railroad  earnings,  and  multiply  the  result  by  1^,  obtaining,  at  6%,  9% 
as  an  equivalent  rate  on  gross  earnings,  or  at  8%  as  a  basis  of  capitali- 
zation. &f%.  If  the  tax  rate  on  property  or  capital  were  fixed  at  1%, 
the  above  rates  would  become  6%  and  4£%. 

Net  earnings  denned. 

In  applying  the  above  method  it  is  obvious  that  we  must  have  a  fixed 
and  uniformly  applied  definition  of  what  constitute  net  earnings. 
Since  the  object  of  ascertaining  the  net  earnings  is  to  ascertain  from 
them  the  value  of  the  property,  it  is  obvious  that  the  nel  earnings 
should  include  all  things  and  only  Buch  things  as  belong  to  the  owners 
of  the  property,  whether  they  be  the  stockholders,  or  the  bondholders, 
or    the    lessors   of    property   used    by    the    corporation.     Hence    the 


96  REPORT  OF   COMMISSION    ON    REVEN1  B   AND  TAXATION". 

operating  expenses,  which  are  deducted  from  the  gross  earnings  in  order 
to  ascertain  the  nel  earnings  in  this  Bense,  should  include  only  the  bare 
expenses  of  operation  and  of  maintenance  to  the  narrowest  Bense  of 
those  terms.  The  operating  expenses  would  Include,  in  the  case  of  a 
railroad,  only  the  items  which  are  denominated  and  defined  by  the 
Interstate  Commerce  Commission  as  "maintenance  of  way  and  struc- 
tures," including:  "repairs  of  roadway  and  renewal  of  rails  and  ties," 
"repairs  and  renewal  of  bridges  and  other  structures";  "maintenance 
of  equipment,"  "conducting  transportation."  including:  "salaries  and 
wages  in  the  operating  department,"  "supplies,"  "car  mileage,"  "switch- 
ing charges,"  ""damage  for  injuries,"  "advertising,"  "outside  agencies 
and  commissions";  and  "general  expenses."  They  would  not  include: 
"taxes,"  "rental  of  tracks  and  terminals,"  "interest  on  bonds,"  nor 
"balances  available  for  dividends."  These  terms,  so  far  as  they  apply 
to  railroads,  have  been  carefully  defined,  for  the  United  States  at  large, 
by  the  Interstate  Commerce  Commission,  and  for  California  by  our  own 
State  Hoard  of  Equalization,  and  in  general  are  fully  understood  and 
applied  bv  all  more  careful  accountants.  Precisely  analogous  items  are 
carried  in  the  accounts  of  almost  all  public-service  corporations,  and 
the  accounts  can  always  be  segregated  under  similar  divisions. 

Rents  or  rental  charges  not  included  among-  operating-  expenses. 
Some  corporation  officers  have  argued  before  the  Commission  that 
renl  is  an  operating  expense  and  should  be  deducted  before  the  net 
earnings  are  computed.  This  rests  on  a  fundamental  misconception  of 
the  purpose  of  ascertaining  net  income.  If  net  income  is  to  be  used  to 
determine  the  rate  of  a  tax  on  gross  earnings,  such  tax  to  be  in  lien  of 
all  taxes  on  property  dsed  in  operation  by  a  corporation,  all  net  income 
accruing  to  that  property  or  from  its  use  must  be  included.  All  per- 
sons readily  admit  that  interest  on  bonded  indebtedness  is  not  an 
operating  expensi  ;  if  that  is  the  case,  rent  is  not  an  operating  expense. 
It  would  have  made  no  difference,  so  far  as  this  matter  is  concerned, 
whether  the  Southern  Pacific  build  the  Lucin  cut-off.  as  it  did,  with  the 
proceeds  of  bonds  on  which  it  pays  a  certain  Bum  annually  as  interest, 
or  had  leased  that  greal  bridge  from  some  other  company,  paying  the 

-.nne  sum  annually  as  rent.  In  neither  case  would  the  annual  pay- 
ment be  an  operating  expense;  in  each  case  it  is  a  return  to  property. 

Annual  payments  on  account  of  the  franchise. 

In    the    Bame    way.    and    even    more    fallaciously,    corporation    ol'lieers. 

especially   streel    railroad   ol'lieers.   have   argued   thai    they   should   be 

allowed  to  deducl  IV the  i un1  of  taxes  due  the  stale  any  payments 

made  to  the  cities  on  behalf  of  the  franchises.    This  argumenl  is  even 

more  shallow  than  the  preceding  one;  ii  is.  in  fact,  little  short  of  absurd. 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  97 

It  rests  upon  the  mere  accidents  that  these  payments  are  sometimes 
miscalled  taxes  and  are  usually  measured  by  the  gross  earnings.  As 
a  matter  of  fact,  these  payments  are  rentals,  for  the  use  of  a  certain 
kind  of  public  property,  namely,  the  streets.  It  is  quite  as  absurd  for 
a  street  car  company  to  call  these  "taxes"  and  ask  that  they  be  allowed 
to  subtract  such  payments  from  their  taxes  due  the  State,  as  it  would 
be  to  call  the  rents  paid  for  office  buildings  taxes  and  ask  to  have  them 
deducted. 

A  street  car  or  other  public-service  corporation  can  acquire  its  fran- 
chises from  cities  in  one  of  two  ways:  (1)  it  may  buy  them  outright 
for  a  certain  sum  down,  in  which  case  it  usually  issues  bonds  for  the 
amount  and  pays  the  bondholders  interest  thereon.  No  one  would 
have  the  effrontery  to  argue  that  such  interest  was  an  operating 
expense.  Or.  (2)  it  may  make  a  series  of  annual  payments  in  pro- 
portion to  business  done  or  gross  earnings.  These  payments  are  pre- 
cisely the  same  in  nature  as  the  interest  payments  under  the  first 
method,  and  so  closely  are  such  things  figured  when  franchises  are  bid 
for  that  the  one  is  the  precise  equivalent  of  the  other. 

These  payments  are  rents  and  should  not  even  be  included  in  operat- 
ing expenses;  to  ask  that  they  be  considered  taxes  and  deducted  from 
the  amount  paid  the  State  is  to  ask  exemption  for  one  of  the  most 
valuable  items  of  property  the  companies  use,  namely,  their  franchises. 

Reports  made  to  the  Commission. 

In  the  reports  asked  for  by  this  Commission  from  the  different 
public-service  corporations,  the  effort  has  been  made  to  ascertain : 

First,  the  gross  earnings  from  operation;  under  which  would  not  be 
included  any  returns  or  revenues  obtained  from  investments  in  property 
not  directly  used  in  the  peculiar  business  in  which  the  corporation 
was  engaged.  Thus,  for  example,  revenues  obtained  from  the  sale 
of  railroad  lands  or  from  investments  of  surplus  or  sinking  funds 
held  by  other  classes  of  corporations  would  not  be  included  in  the 
gross  earn  in  un. 

S(<"n<l.  the  operating  expenses  in  the  sense  above  defined,  exclusive 
of  all  items  belonging  to  the  capital  account,  and  of  the  nature  of 
interest,  rents,  etc. 

Earnings  of  similar  companies  outside  of  California. 

In  order  to  ascertain  whether  the  reports  made  to  us  by  the  Cali- 
fornia companies  were  normal  or  whether  they  represented  exceptional 
and  unusual  conditions,  also  for  the  purpose  of  obtaining  a  check 
upon  the  accuracy  of  the  returns  made  to  us,  the  Commission  has 
ascertained,  so  far  as  possible,  from  other  sources  what  the  proportion 

7— RT 


Its  KKl'ORT  OF   COMMISSION   ON   REVENUE   AND   TAXATION. 

of  operating  expenses  to  gross  earnings  was  for  each  of  these  different 
classes  of  corporations  in  other  parts  of  the  country.  In  this  way  it 
is  thought  that  the  classes  into  which  the  different  corporations  fall, 
according  to  the  percentage  which  their  net  earnings  hear  to  the 
gross  earnings,  have  been  representatively  determined,  and  the  various 
types  of  corporations  ascertained.  The  detailed  figures  for  each  of 
these  will  be  given  in  connection  with  the  special  discussion  of  the 
taxation  of  each  class  of  corporations. 

Rate  of  capitalization. 

The  rate  of  interest  which  should  be  allowed  in  equity  to  investors 
in  each  of  the  different  classes  of  corporations  is  a  matter  which  is 
often  discussed  in  connection  with  fixing  the  rates  or  charges  for  their 
services  to  be  allowed  public  service  corporations  by  county  and  city 
boards  and  the  like.  The  Commission  has  made  no  effort  to  solve  the 
much  vexed  question  of  what  the  rate  ought  to  be,  but  only  what  rate 
is  accepted.  It  has  simply  undertaken  to  ascertain,  as  nearly  as  may 
be,  in  the  case  of  each  of  the  various  classes  of  corporations,  approxi- 
mately what  rate  the  market  quotations  seem  to  indicate  as  one  satis- 
factory to  the  investors  themselves.  Thus,  for  example,  it  was  ascer- 
tained that  the  investors  in  the  securities  of  the  Southern  Pacific  Com- 
pany in  1904  were  contented  with  5.655%  returns  on  their  investment, 
which  allowing  1%  additional  for  taxes,  would  give  us  6.655%  as  the 
basis  of  capitalization.  The  Santa  Fe  investors  were  content  with 
6.172%,  and  so  on.  The  percentages  to  be  used  will  vary  somewhat 
with  the  risk  of  the  business  and  are  ordinarily  higher  for  small  com- 
panies. This  offsets  to  some  extent  the  fact  that  their  net  receipts  are 
a  smaller  proportion  of  their  gross  income  than  in  the  case  of  larger 
companies,  owing  to  the  greater  expense  of  operation. 

The  rates  at  which  the  net  income  of  different  classes  of  industries 
should  be  capitalized  is  fairly  well  known  among  business  men,  and 
the  rates  adopted  by  the  Commission  for  the  different  classes  of  corpora- 
tions are  those  which  have  generally  prevailed. 

The  rate  on  property. 

What  constitutes  a  fair  rate  on  the  property  with  which  to  compare 
the  effect  of  any  given  rate  on  gross  earnings  is  an  extremely  intricate 
question.  The  prevailing  rates  of  taxation  as  ascertained  by  the  Com- 
mission throughout  this  State  are  :  About  $1.75  per  $100  of  assessed 
valuation  for  property  outside  of  corporate  limits,  and  about  $2.55  per 
$100  of  assessed  valuation  for  property  inside  corporate  limits.  The 
average  of  all  taxes  both  inside  and  out  is  about  $1,825  per  $100  of 
assessed  valuation.  The  Commission  has  been  inclined  to  think  that 
the  assessed  valuation  is  about  60%  of  the  true  value.     This  percentage 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  99 

varies  in  different  parts  of  the  State  very  largely,  and  varies  considera- 
bly from  year  to  year.  It  varies  also  from  one  piece  of  property  to 
another.  There  is  no  practical  method  of  ascertaining  exactly  what 
this  average  percentage  is  short  of  an  attempt  to  revalue  all  the  prop- 
erty of  the  State,  which  is  equivalent  to  remaking  the  assessment  rolls 
of  each  and  every  county.  This  is  a  task  far  beyond  the  means  of  the 
Commission  and  the  time  at  its  disposal.  It  is  practically  certain  from 
the  extensive  investigation  made  by  the  Census  Bureau  and  stated  in 
another  chapter  of  this  Report,  that  farming  lands  are  assessed  on  the 
average  at  about  65%,  making  taxes  on  this  class  of  property  on  the 
average  1.14%  of  the  true  value.  The  tax  rate  on  city  property,  being 
considerably  higher,  would  offset  to  a  considerable  extent  any  lower 
valuation  that  may  prevail  in  the  cities.  Even  if  property  is  assessed 
as  low  as  50%  of  its  true  value  the  average  burden  of  taxation  through- 
out the  State  is  still  close  to  1%. 

The  Commission  has  been  literally  bombarded  with  so-called  "  evi- 
dence" submitted  by  interested  parties  that  property  is  assessed  for 
less  than  60%  of  its  true  value.  This  "evidence"  usually  takes  the 
form  of  ex  parte  statements  as  to  assessed  and  market  values,  and  some- 
times of  actual  tax  bills  and  deeds  showing  the  sale  of  the  property 
covered  thereby  at  prices  far  above  the  assessed  value.  The  ultimate 
effect  of  this  "evidence"  on  the  minds  of  the  members  is  that  these  are 
more  or  less  cleverly  selected  special  cases,  usually  isolated;  exceptions 
which  rather  prove  than  disprove  the  rule.  Assessor  after  assessor  has 
declared  that  he  never  knowingly  assesses  any  property  at  less  than 
two  thirds  of  its  "full  cash  value  "  as  denned  by  law,  which,  it  must  be 
remembered,  is  not  the  same  as  "highest  market  value."  To  offset  the 
above  evidence  of  undervaluation  it  would  be  easy  to  collect  just  as 
many  instances  of  overvaluation.  It  is  the  average  that  counts,  and 
the  average  is  fixed  by  the  multitude  of  common  people  who  pay  taxes  on 
their  little  homes  or  farms,  not  by  the  shrewd  speculators  who  evade 
taxes  on  property  whose  values  they  boom. 

The  Commission  has  assumed  throughout  this  Report  that  property 
now  on  the  tax  rolls  bears  a  burden  of  about  1%  of  its  true  value.  It 
should  be  stated  in  this  connection  that  the  Commission  uses  the  term 
"true  value"  or  "full  cash  value"  in  the  sense  in  which  it  is  denned  in 
the  Code,  namely,  that  value  at  which  the  property  would  be  taken  in 
payment  of  a  just  debt  due  from  a  solvent  creditor.  This  is  not  the 
equivalent  of  the  highest  market  value  which  the  property  might  com- 
mand under  special  circumstances.  It  should  further  be  stated  that 
the  Commission  means  in  this  respect  to  include  only  property  now  on 
the  tax  rolls,  and  that  in  the  nature  of  things  no  allowance  is  made  or 
can  be  made  for  additional  property  such  as  personal  property  belong- 
ing to  the  owner  of  this  class  of  property  but  concealed  from  the  assessor 


lilil  REPORT   OP   COMMISSION   ON    BEVEN1  E   AND  TAXATION. 

so  a-  to  evade  taxation.  This  Commission  holds  that  this  is  the 
only  proper  basis  for  comparison  as  to  the  actual  tax  rates,  and  regards 
the  criticisms  Bometimes  advanced  to  the  effect  thai  this  rate  makes  no 

allowance  for  property  which  ought  to  be  assessed  and  is  not  assessed, 
as  not  well  taken.  The  fact  is,  that  the  property  which  we  succeed  in 
reaching  under  our  present  tax  system  bears  on  the  average  a  burden 
of  taxation  equal  to  about  1%  on  its  full  cash  value. 

What  constitutes  a  " fair  rate "  of  taxation  must  be  determined  pri- 
marily by  the  needs  of  the  different  branches  of  the  government.  The 
amount  which  it  is  necessary  to  raise  apportioned  among  the  subjects 
upon  which  the  levy  is  to  be  made  will  ultimately  give  the  exact  rate. 
But  when  we  depart  from  the  method  of  apportionment  heretofore  in 
vogue  and  establish  a  fixed  tariff  upon  certain  classes  of  tax  subjects,  as 
is  proposed  by  this  Commission,  for  the  subjects  selected  for  State  taxa- 
tion, we  have  to  assume  in  advance  what  will  ultimately  be  the  rate 
necessary  to  be  levied  upon  other  property.  The  Commission  is  of  the 
opinion  that  in  the  long  run  the  various  classes  of  property  in  the  State 
will  be  called  upon  to  contribute  at  the  rate  of  about  1%  per  annum  to 
the  support  of  the  different  branches  of  government,  and  that  this 
amount  is  about  what  the  services  of  the  government  are  worth  to  the 
taxpayers,  and  sets  approximately  what  the  various  branches  of  the 
government  ought  to  levy. 

In  another  sense,  what  constitutes  a  fair  rate  of.  taxation  will  ulti- 
mately he  determined  by  the  general  consensus  of  opinion.  The 
"fairness"  of  a  tax  rate  depends  primarily  upon  the  value  of  the 
government's  services  to  the  taxpayer.  This,  like  any  other  '"value" 
not  fixed  by  a  price  in  the  open  market,  is  largely  a  matter  of  opinion. 
In  the  Tinted  States  in  general  where  most  of  the  taxes  are  levied  on 
property  the  rates  run  from  about  1%  to  l\%  or  in  extreme  cases  to  2% 
upon  the  true  value  of  the  property.  Business  men,  especially  those 
who  deal  in  real  estate,  very  generally  reckon  that  1%  is  the  burden 
of  taxation,  and  pretty  generally  agree  that  such  a  rate  is  fair  and 
equitable.  If  the  tax  rate  exceeds  this  by  very  much,  there  is  usually 
a  complaint  and  t  he  government  is  regarded  as  extravagant  or  criticised 
for  waste  of  public  money. 

The  adoption  of  1  as  the  basis  of  all  computations  and  not  the 
actual  averages  ascertained,  namely,  1.14%  for  rural  property  and  1.53% 
for  city  property,  is  justified  on  the  ground  that  the  plan  of  separation 
proposed  will  reduce  the  present  burden  of  taxation  on  real  estate  by 
about  the  amount  of  the  fraction  rejected. 

Chart  for  computing"  the  rate  on  gross  earnings  equivah  nt  to  a 
given  rate  on  property. 
The  accompanying  chart,  prepared    by   Dr.  T.  M.  Putnam,  of  the 
Mathematical    Department   of   the   University   of   California,  which  is 


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102  REPORT  OF  COMMISSION   ON  REVEN1  K   AND   TAXATION. 

known  technically  as  b  nomograph,  ahows,  almoat  a1  a  glance,  what  is 
the  tax  rate  on  gross  earnings  corresponding  to  any  given  tax  rate  on 
property  for  each  percentage  net  to  gross  and  at  each  percentage  rate  of 
capitalization,  and  saves  the  necessity  of  computing  these  problems. 

To  use  the  nomograph  find  the  ascertained  rate  of  nel  earnings  to 
gross  at  the  bottom,  follow  up  perpendicularly  until  the  line  marked 
with  the  assumed  rate  of  capitalization  is  reached,  then  go  at  right 
angles  to  the  Left  margin  and  read  the  tax  rate  on  the  gross  earnings. 
If  we  want  to  know  what  rate  of  capitalization  is  assumed  by  a  given 
tax  rate  on  gross  earnings  the  percentage  of  net  to  gross  being  known, 
find  where  the  line  from  the  tax  rate  intersects  the  line  from  the  net 
earnings  percentage,  and  read  on  the  fan-like  diagonal  lines  the  rate  of 
capitalization  Bought. 

The  nomograph  is  drawn  on  the  supposition  that  1%  on  property  is 
a  fair  tax  rate.  If  any  other  rate  is  accepted,  as  H%,  the  same  graph 
can  be  nsed  by  first  multiplying  percentage  of  net  earnings  to  gross  by 
the  new  rate,  and  using  the  product  as  the  net  earnings. 

The  nomograph  has  the  advantage  over  the  arithmetical  computation 
of  the  rates  that  whereas  the  computation  is  simple  enough  for  round 
numbers  and  flat  rates,  it  becomes  com]. lex  and  tedious  for  other 
amounts  and  fractional  rates;  but  these  can  be  read  as  easily  on  the 
nomograph  as  the  round  numbers. 


REPORT   OP   COMMISSION   ON   REVENUE   AND   TAXATION.  103 

CHAPTER  IV. 

THE  TAXATION  Of  RAILROADS. 


A.     TAXATION  OF   RAILROADS  IN  CALIFORNIA. 

The  present  system. 

Under  the  existing  revenue  system  of  California,  railroads  are  taxed 
on  their  property  in  substantially  the  same  manner  as  other  property 
owners  are  taxed.  The  only  difference  is  that  certain  classes  of  property, 
not  local  in  character,  belonging  to  railroads  are  assessed  or  valued  for 
purposes  of  taxation  by  the  State  Board  of  Equalization  and  not  by  the 
county  assessors. 

The  State  Board  assesses  that  part  of  the  property  of  all  railroads 
operated  in  more  than  one  county,  which  is  covered  by  the  terms:  "the 
franchise,  roadway,  roadbed,  rails,  and  rolling  stock."  All  other 
property  belonging  to  railroads,  such  as  the  depots,  stations,  shops, 
and  other  buildings,  is  assessed  by  the  local  or  county  assessors.  Rail- 
road property  of  the  kind  specified  above  is  the  only  class  of  property 
in  the  State  which  is  assessed  for  purposes  of  taxation  by  any  authority 
other  than  the  local  assessor.  The  assessment  of  all  railroads,  as  made 
by  the  State  board,  is  apportioned  among  the  counties,  cities,  towns, 
and  districts  in  which  that  railroad  lies  in  proportion  to  the  mileage 
in  each.  The  total  assessment  of  all  railroad  property  under  the 
jurisdiction  of- the  State  board  was  nearly  $70,000,000  in  1905.  It 
was  raised  to  over  $81,000,000  in  1906. 

The  taxes  levied  by  the  State  and  by  the  counties  upon  the  assessment 
made  by  the  State  Board  are  all  paid  by  the  railroads  directly  to  the 
State.  The  State  Controller  is  held  responsible  for  their  collection. 
After  they  have  been  covered  into  the  State  treasury,  that  portion 
which  belongs  to  the  counties  is  paid  over  to  them  by  the  State.  During 
the  two  fiscal  years  1903-1904  and  1904-1905  the  average  of  the  railroad 
taxes  levied  on  the  assessment  made  by  the  State  for  the  State  and 
counties  was  $1,233,439,  of  which  $360,949  was  for  the  State  and 
$872,490  for  the  counties. 

In  addition  to  the  State  and  county  taxes  on  the  assessment  made 
by  the  State  Board  the  railroads  pay  directly  to  the  counties  the  county 
taxes  levied  on  that  part  of  their  property  which  is  assessed  by  the 
county  assessors ;  and  directly  to  the  cities  and  to  the  counties  on  behalf 
of  school  and  other  districts,  the  taxes  levied  both  on  the  mileage  and 
any  other  property  in  such  cities  and  districts. 

The  following  table  shows  the  total  taxes  of  all  sorts  paid  by  railroads 
operated  in  more  than  one  county  in  California  in  1904: 


104 


REPORT   OP   COMMISSION    OK    REVENUE   AND  TAXATION. 


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REPORT  OF   COMMISSION    ON    REVENUE    AND   TAXATION'. 


10; 


It  should  be  observed  that  although  the  foregoing  table  is  for  1904, 
and  not  for  the  last  fiscal  year,  1905,  yet  the  figures  are  strictly  illus- 
trative of  the  taxation  of  railroads  in  this  State.  The  amounts  change 
from  year  to  year,  but  the  proportions  are  nearly  stable. 

The  table  may  be  summarized  as  follows :  Three  fourths  of  the  taxes 
paid  by  railroads  are  levied  on  the  "State  Board  Assessment,"  and 
about  one  eighth  goes  to  the  counties  on  their  county  assessment,  while 
the  cities  receive  about  one  eighth. 

Historical  survey. 

Before  the  adoption  of  the  present  State  Constitution,  in  1879,  all 
railroad  property  was  assessed  by  the  local  or  county  assessors.  Each 
assessor  was  supposed  to  assess  that  part  of  each  railroad  which  he 
found  in  bis  county.  Naturally  the  resulting  assessments  lacked  uni- 
formity and  equality,  as  the  value  of  one  part  of  a  railroad,  as,  for 
example,  that  within  one  county,  can  be  determined  solely  by  reference 
to  the  system  as  a  whole.  There  was  one  provision  of  the  law  which 
seemed  to  take  a  broader  view,  and  that  was  one  which  prescribed  that 
the  rolling  stock  should  be  assessed  as  a  whole  and  apportioned  to  each 
county  en  a  mileage  basis.* 

But  no  adequate  provision  seems  to  have  been  made  to  carry  this 
provision  into  effect. 

After  the  establishment  of  the  Hist  State  Board  of  Equalization,  in 
1870,  the  suggestion  was  frequently  offered  that  this  board  should  be 
made  the  assessment  board  for  railroads  operating  in  more  than  one 
county.     This  suggestion  was  incorporated  in  the  Constitution  of  1879. 

The  power  of  the  State  to  tax  railroad  property,  even  when  the  rail- 
road was  incorporated  under  the  laws  of  the  United  States,  or  was 
engaged  in  interstate  commerce,  or  had  received  subsidies  from  the 
Federal  Government,  or  in  which  the  United  State  still  retained  a 
proprietary  interest,  was  early  called  in  question.  But  the  right  and 
power  of  the  State  to  tax  such  property  was  affirmed  in  the  case  of 
PeojJr  vs.  Tin  Central  Pacific  Railroad  Company,  43  Cal.  398  (April, 
1872).  Under  the  old  Constitution,  after  the  decision  just  referred  to, 
no  serious  legal  difficulties  arose  over  the  assessment  of  railroad  prop- 
erty. The  system  was.  however,  very  faulty  and  there  were  striking 
differences  in  the  standard  of  assessment  between  the  different  counties. 

When    the    new  Constitution  was    adopted    the    procedure    laid   down 

therein  for  the  taxation  of  railroad-  was  received  with  very  had  grace 

by  the  companies.  Their  objections  led  to  a  large  amount  of  confused 
litigation,  the  tangle  of  which  was  not  fully  unraveled  until  .January  ti. 
1895,  when    the  decision    in   favor  of  tin-   State   was   rendered  by   the 


'  Political  Code.  Suction  W.i,  as  amended  in  L873-4,  which  tell  away  in  lssn  when   the 
new  system  was  inaugurated. 


106  I  a  TORT   OP   COMMISSION   ON   REVENUE  AND   TAXATION. 

Supreme  Court  in  six  cases,  the  leading  one  of  which  was  People  vs. 
Tin  ('i  ntral  Pacific  Railroad  Company,  105  Cal.  576.  This  was  appealed 
to  the  United  States  Supreme  Court,  hut  the  judgment  was  not  dis- 
turbed.  (S  Central  Pacific  Railroad  Company  vs.  California,  162 
U.  S.  91.) 

During  the  first  five  years  (1880  to  1884  inclusive)  of  this  fifteen-year 
period  of  litigation,  the  objections  raised  by  the  railroad  companies  to  the 
payment  of  their  taxes  on  the  assessments  made  by  the  State  Board  of 
Equalization  rested  ehieily  on  technicalities.  Some  of  these  concerned 
the  validity  of  the  assessment  because  of  the  alleged  inclusion  of  items 
not  assessable  by  the  State  Board;  others  questioned  the  power  of  cer- 
tain officials  to  receive  payments  and  to  legally  release  the  tax  liens  on 
the  roads;  others  again  turned  upon  the  validity  of  various  compro- 
mises entered  into  by  local  officials,  or  by  certain  State  officials,  and 
not  regarded  by  others  as  legal.  All  of  the  cases  were  complicated  by 
conflicts  of  jurisdiction  of  different  officials  and  by  serious  contradic- 
tions or  weaknesses  in  the  early  laws.  Tims,  for  example,  under  the 
first  revenue  Law  passed  after  the  adoption  of  the  Constitution,  in  1880, 
the  collection  of  railroad  taxes  was  left,  as  before,  to  the  county  tax 
collectors.  In  the  general  alarm  which  was  felt  at  the  refusal  of  the 
largest  roads  to  pay  these  taxes,  many  county  boards  of  supervisors 
considered  the  advisability  of  compromising  for  whatever  sums  the 
roads  would  pay,  and  in  not  a  few  instances  such  compromises  were 
effected.  But  in  1883  the  law  was  amended  so  as  to  make  it  the  duty 
of  the  State  Controller  to  superintend  and  enforce  the  collection  of  all 
taxes  levied  on  the  State  Board  assessment  of  railroads,  both  for  the 
State  and  the  county.     This  brought  the  law  into  workable  form. 

By  various  compromises  and  under  the  decisions  rendered  in  some  of 
the  cases,  a  part  of  the  taxes  levied  upon  railroads  for  the  years  1880 
to  1884  was  paid  at  different  times  between  1880  and  1893.  But  up  to 
the  latter  date  no  part  of  the  taxes  levied  on  the  larger  systems  for  the 
years  1885  to  1887  had  been  paid.  Each  year  presented  new  objections 
and  increased  litigation. 

When  cleared  of  technicalities,  these  cases  finally  resulted  in  raising 
the  one  question;  namely,  as  to  whether  a  Federal  franchise  had  been 
i--essed  or  not.  It  was  finally  determined  that  t  lie  State  could  not  tax 
a  Federal  franchise,  but  that  the  assessment  made  by  the  State  Board 
would  be  Legal  if  it  did  not  include  a  Federal  franchise.  It  is  now  held 
that  the  State  Board  does  not  assess  the  Federal  franchise,  bul  merely 
that  granted  by  the  State.  How  these  two  can  be  distinguished,  as  a 
matter  of  actual  practice  in  making  a  valuation,  is  hard  to  understand. 
Still  the  assessment  is  mad'  each  year  and  the  railroads  pay  their 
taxes,  so  the  question  is  one  of  purely  theoretical  import. 

In  1893,  after  the  litigation  was  marly  closed,  the  Legislature  ordered 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  107 

a  re-assessment  of  the  railroads  in  all  those  cases  in  which  previous 
assessments  had  been  declared  illegal.  Credit  was  to  be  allowed  for  all 
sums  previously  paid  by  the  railroads  on  account  of  taxes.  The 
re-assessments  ordered  were  made  by  the  State  Board  of  Equalization. 
Final  payment  was  made  November  22,  1894.  Since  1888  all  but  a 
few  small  portions  of  the  annual  taxes  on  railroads  have  been  paid 
when  due  on  the  assessment  made  by  the  State  Board. 

The  following  tables  show  the  assessments  and   taxes  paid  by  the 
railroads  from  1880  to  date: 


Table  Showing  the  Assessment  by  the   State  Board  of  Equalization,   from  the  Date  of 
Its  Establishment,  of  Railroads  Operated  in  More  Than  One  County. 

(Covering  the  franchise,  right  of  way,  roadbed,  rails,  and  the  rolling  stock.) 

1880  . - - $31,174,120 

1881  34,829,668 

18go"  ' - 27,602,313 

!_.  "  "ZZZZZ-1 -  40,017,000 

1>>4  ZZ--Z 50,746,500 

1885  "  "         49,035,750 

1886  ZZZZZZ  ZZZZZZ  ZZZZZZ  ZZZZZ ZZZZZZi - 48,051,100 

j887  47,677,453 

lg88  ZZZ'ZZZIZ --- - --  4:5.242,652 

lg89"  40,488,652 

1890 "Z. 40,198,652 

1891... - - - ----- -41,414,000 

,V).,  41,956,000 

1893"  ...42,478,640 

uetZZIZZZZZZZZZZZZZZ"] 42,730,640 

1895  _ 43,018,640 

1896  43,223,344 

uwZZZZZZZZZZZZZZZZZZZZI - ..43,491,745 

1898 44,457,473 

1899 46,394,275 

1900 - - 47,711,755 

1901 — -— 49,121,485 

1902       64,812,603 

1903         '..'... - -- - ---  84,187,758 

1904  "  "ZZZZZ! -  69,669,566 

1905  '  !ZZZZZ"Z" - - 69,820,186 

1906"      ....."."."."."..."......--" - 81,010,819 


* 


•Included  assessment  of  the  United  Railroads  of  San  Francisco,  $20,007,700,  afterwards 
eliminated  by  order  of  the  courts,  leaving  the  assessment  $64,180,058. 


108 


REPORT  OF   COMMISSION    ON   REVENUE    AND   TAXATION. 


Table  Showing  the  "Original  Assessment"  and  the  "Re-Assessment"  of  Certain  Railway 
Properties  Assessed  by  the  State  Board  of  Equalization,  and  Which  Constituted  the 
"Southern  Pacific  System." 

Note:    The  upper  row  oi  figures  after  each  name  shows  the  original  assessment,  and 
the  lower  row  shows  the  re-assessment. 


Name  of  Railroad. 

1880. 

1881. 

1882. 

Amador  Branch.         

216,000 

$275,400 

216,000 

$162.(127 

* 

$164,000 

* 

California  Pacific 

1,801,300 

12.INNI.INMI 

1,866,000 
2,600,000 

1,462,500 

2,000,000 

IXK.1,000 

•J'«« 

Central  Pacific.              . 

12,239,456 
1.0,456,959 

L0,456,959 

13,010,520 
L0,456,959 

18,000,000 

L0,456,959 

Northern  Railway 

1,492,758 

914,400 

1,543,050 

1)14,400 

1,143,000 
914,400 

2,000,000 

1,187,200 

Sacramento  and  Placerville 

1,098 

388,000 

485,048 
388,000 

291.048 

* 

290.000 

* 

Vacs  Valley  and  Clear  Lake 

249.725 
228,400 

246,925 

228,400 

246,925 

190,000 

* 

Stockton  and  Copperopolis 

597,632 

414,455 

580,190 
414,455 

379,355 
* 

400,000 

414,455 

San  Pablo  and  Tulare 

492,800 
427,178 

552,000 
427,178 

460,000 
427,178 

700,000 

427.  ITS 

South' in  Pacific 

10,483,518 

s..-):  is,  I2ti 

11,739,915 

8,538.12(1 

8,226,135 

8,574,120 

13.000.000 

8,707,400 

Name  of  Railroad. 


L884. 


l-v.. 


1886. 


1887. 


Amador  Branch 


California  Pacific 


Central  Pacific 


Northern  Railway 


Sacra ntn  and  Placerville. 


Vaca  Valley  and  Clear  Lake 


Stockton  and  Coppcropolis 


San  Pablo  and  Tulare 


Southern  Pacific 


South  Pacific  Coast 


$175,500 

* 


2,1)0(1. IKHI 
2.(HKI.OOO 

2 1,01  H),000 
L0,878,245 

L',3(H».tMM.I 

1,187,200 
291.000 


19(1, 

# 


125,000 

* 


0,000 

427.  ITS 

L7,000,000 
9,570,000 


$1(12,000 
* 


2,000,000 

2,000,000 

22,(M)(i,0»Ki 
11,153,800 

2,300,000 

1.1  sT. 2i  in 

315,2.-.!  i 


l'Ml.tHKI 
* 


4(K). 

900,000 


1T.1KKI,(HHI 

9,570,2(KI 


irl62,000 


2,000,000 
2,000,000 

20,000.000 
11,153,297 

2,7(X).(hki 

LIST.: 


$162,000 

* 

2.500.000 

2.noo,000 

18,00O.(HKI 

L2.525.438 

3,000,000 
L.187,200 


3(ni.(mki        :;ihi. i 


PHI.IKK.) 


* 


900,00  i 
427,178 

17,000,000 
9,57U.2(MI 


2i  K  I.I  M  HI 

* 


350,0"  hi 


IMHI.IHNI 

427.178 

16..r ,0<i0 

10,223,300 

750,000 

453,(MM) 


•Not  n-assessed. 


REPORT   OF   COMMISSION"   ON   REVENUE   AND   TAXATION. 


109 


Receipts  of  Taxes  Levied  on  the  Assessment  of  Railroads  Made  by  the  State  Board  of 

Equalization. 


Year. 

cross  Receipts  by 

State  Treasury, 

State  and  County 

Taxes  Combined. 

Amount  Remitted 
to  the  Counties. 

Net  Amount 
Retained  by 

Stat.-. 

1884 -.. 

$58,944  34 

57.698  62 

850,819  84 

81,976  83 

90,332  52 

588,690  09 

titIS,  1 85  77 

597,568  71 

600,329  58 

.-.S5.048  90 

1,220,892  48+ 

1,282.325  99t 

1.245,751  19+ 

6.50,683  72 

758,394  14 

717,864  84 

846,082  20 

837,147  34 

884,062  42 

1,115,917  68 

1,350,963  00 

1,303,208  02 

655,528  73 

$38,738  00 
41,152  .54 
411,654  35 
145,398  71 
56,342  48 
370,661  21 
375,579  77 
364,633  82 
416.515  14 
397,753  08 
738,341  691 
812,437  89+ 
77: t. 742  80+ 
466,508  30 
537,329  42 
501,418  60 
566,126  27 
595,843  05 
645,928  48 
861,592  58 
857,979  40 
930,475  84 
483,856  77 

$20,206  34 
1 1 1  546  08 

1885-.   --. 

1886 

43! (.165  49 

1887  

63  121  88* 

1888 

:;;;.'.»!»0  04 

1889  .            

218,028  88 

1890 

1891 -- .. 

L892 - 

L'! '2,606  00 
232. !«4  W) 
183,814  44 

1893 

187,295  82 

1894..     

482,550  7!>  + 

1895        

Hi!t,888  10  + 

1896 

L897 

1898  

1899 

466,008  39  + 
1S4.175  42 
221,064  72 
216,446  24 

1900 

1901 

279,955  93 

241,304  29 

1902 

238,133  94 

1903 

1904 

1905 . 

1906  (6  months) 

2:>4.325  10 
492,983  60 

172. 732  18 
171.671  96 

*  Deficit.        +  Includes  back  taxes.     See  preceding  text  and  table  of  re-assessment. 


B.     THE  TAXATION  OF  RAILROADS  IN  OTHER  STATES. 
Bibliographical  note. 

In  1903  the  Interstate  Commerce  Commission  published  an  extensive  report  on  the 
Taxation  of  Railways  in  the  United  States  from  1890-1902.  The  report  is  Part  V  of 
Appendix  G  of  the  Sixteenth  Annual  Report  of  the  Interstate  Commerce  Commission, 
and  being  readily  available  makes  it  unnecessary  to  go  extensively  into  the  details  oi 
railroad  taxation  in  this  report.  Interesting  comments  on  the  taxation  of  railroads  in 
selected  states  will  be  found  in  Volume  XI  of  the  Report  of  the  United  States  Indus- 
trial Commission,  1901.  The  best  recent  report  is  that  of  the  Ontario  Commission  on 
Railway  Taxation,  1905,  which  visited  many  states  and  inquired  into  the  workings  of 
the  tax  laws  in  each.    That  commission  recommends  the  gross  earnings  tax. 

The  following  table  from  the  17th  Annual  Report  on  the  Statistics  of 
Railways  in  the  United  States  by  the  Interstate  Commerce  Commission 
shows  exactly  how  each  State  taxes  railways: 


110 


REPORT   OF   COMMISSION   ON   REVENUE  AND   TAXATION. 


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REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 


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112  REPORT   OF   COMMISSION    ON   REVENUE   AND   TAXATION. 

It  will  be  seen  Erom  the  foregoing  table  that  the  method*  of  taxation 
are  Bomewhal  varied,  and  that  in  some  cases  several  methods  arc 
combined. 

These  taxes  i'all  into  three  principal  groups:  1.  The  General  Prop- 
erty Tax;   L'.  Taxes  on  Capital  stock:   ::.  Taxes  on  Earnings. 

1.  The  general  property  tax  on  railroads. 

In  the  greal  majority  of  the  states  railroads  are  still  taxed  in  the 
same  manner  as  are  individuals;  that  is,  on  their  genera]  property; 
hut  in  almost  all  instances  special  methods  have  been  devised  for  the 
application  of  the  general  property  tax  to  railroads.  The  method  of 
assessment  is  usually  different  in  the  case  of  railroads  from  that  applied 
to  individuals.  The  most  common  method  of  assessment  is  one  similar 
to  ours;  namely,  assessment  of  the  main  part  of  the  system,  or.  at  least, 
of  a  considerable  part  of  the  property,  by  some  central  authority,  and 
sipportionmenl  among  the  taxing  districts.  The  early  method  of  taxing 
railroad  property  throughout  the  country  was  similar  to  that  which 
prevailed  in  California  before  the  adoption  of  the  present  Constitution; 
that  is.  the  assessment  was  made  entirely  by  1  lie  local  assessors.  This 
antique  method  lias  passed  away  in  all  states  except  Rhode  Island. 
Bu1  the  changes  made  ha\v  lieen.  in  most  states,  as  in  California,  only 
such  as  would  make  the  general  property  tax  workable  when  applied  to 
railroad-. 

The  changes  are  all  in  one  general  direction;  namely,  centralization. 
Usually  all  the  operative  property  is  assessed  by  some  central  or  State 
authority,  and  is  then  apportioned  among  the  local  divisions.  Some- 
times. ;is  in  Ohio,  officers  through  whose  districts  a  given  railroad  runs 
form  a  hoard  for  the  assessment  of  that  road.  Sometimes  the  board 
is  an  ex  officio  one,  made  up  of  State  officials,  such  as  the  Governor, 
Auditor,  and  Attorney-General.  But  whatever  the  method  of  assess- 
ment, there  is.  in  all  these  states,  no  essential  departure  from  the 
principles  of  the  general  property  tax. 

In  the  assessment  of  railroads  which  run  through  several  stales,  or 
Reveral  assessment  districts,  it  is  quite  common  to  apply  the  so-called 
"unit  rule.*'  The  "unit  rule*'  may  he  applied  when  the  taxes  are  on 
the  earnings  as  well  as  when  the  taxes  are  ad  valorem.  The  term  "unit 
rule."  as  applied  to  the  taxation  of  railroads,  means  the  appraisal  of 
the  entire  system  as  a  unit.  The  valuation  so  determined  is  then  divided 
in  some  c;ises  by  the  number  of  miles  of  main  track,  or  of  single  track, 
;nid  the  average  so  obtained  multiplied  by  the  number  of  miles  in  the 

Stat i-  district  I   gives  the  assessed  value  for  that  State   i  or  district). 

In  a  similar  manner  the  "unit  rule"  may  be  applied  to  the  apportion- 
ment of  the  earnings. 


REPORT   OF    COMMISSION    OX    REVENUE    AND    TAXATION. 


113 


2.  Taxes  based  on  capital  stock,  etc. 

The  principal  tax  on  railroads  in  Connecticut,  Massachusetts,  and 
in  Pennsylvania  is  one  based  on  the  capital  as  represented  by  the 
shares  of  capital  stock,  or  by  the  funded  indebtedness. 

Connecticut. 

All  operative  railroad  property  in  Connecticut  is  assessed  as  a  unit 
by  the  State  Board  of  Equalization.  The  tax  is  1%  on  the  market 
value  of  the  stock,  plus  the  par  value  of  funded  and  floating  indebted- 
ness. The  valuation  fixed  by  the  board  is  assumed  to  be  a  fair  valuation 
of  the  railroad,  its  rights,  franchises,  and  property  in  the  State.  When 
a  railroad  lies  only  partly  in  the  State  the  total  capital  is  valued  as 
above  for  the  entire  system.  An  average  value  per  mile  for  the  entire 
system  is  then  ascertained,  which  multiplied  by  the  number  of  miles 
in  the  State  is  assumed  to  be  the  value  of  the  property  in  the  State. 

Mr.  Clapperton,  the  expert  for  the  Industrial  Commission,  reported 
that  this  system  "appears  to  be  generally  regarded  in  the  State  as  a 
just  system." 

As  will  be  seen  from  the  above  table  it  yields  $1,114  per  mile,  or, 
with  the  exception  of  Massachusetts  ($1,426  per  mile)  the  highest  tax 
paid  by  railroads  in  any  state  in  the  Union. 

For  comparison  we  present  the  following  table  showing  gross  and 
net  earnings  and  taxes  paid  per  mile  of  road  by  the  principal  railroad 
in  Connecticut  and  the  principal  railroad  in  California  in  1904: 


Gross 

Earnings 

per 

Mile. 


Net 

Earnings 

per 

Mile. 


Per  Cent     Per  Cent 

Taxes  Taxes 

to  Gross   j     to  Net 

Earnings.   Earnings. 


N.  Y.,  X.  II.  &  II. 
Inside  and  outside  of  Connecticut .. 

124,140 

$6,562 

$1,227 

4.45 

S.  P.  System. 

I  nside  and  outside  of  California 

10,750 

3,962 

361 

3.37 

18.8 


9.1 


N  B.— The  New  York,  New  Haven  and  Hartford' Railroad  operates  over  •-'.nun  miles  of  road, 
not  all  of  which  is  in  Connecticut.  The  same  is  true  of  the  Southern  Pacific  with  reference  to 
California  The  comparison  suggested  in  the  table  should  not  be  taken  as  a  comparison  of  Con- 
necticut with  California  strictly ;  it  is  illustrative  only  in  the  most  general  sense. 

The  Connecticut  system  could  be  applied  in  California  with  some 
adjustments  to  meet  the  local  conditions,  and  would  probably  be  an 
eminently  fair  and  effective  method  of  railroad  taxation. 

Massachusetts. 

The  Massachusetts  railroads  paid,  in  1!)04,  the  highesl  taxes,  per  mile, 
of  any  mads  in  the  country.  This  is  in  pari  due  to  the  density  of 
population  which  affords  the  roads  a  large  traffic  of  high-class  freight 
and  heavy  passenger  traffic  with  consequent   large  earnings  and  high 

8  — RT 


( 


11  J  KKI'ORT   OF    (<»M  MISSION    ON    REVENUE    AND   TAXATION". 

values  for  their  property.     Bui  it  \a  also  due  in  Large  measure  1"  the 

excellen I  her  revenue  laws  and  the  etlieicney  of  their  administration. 

Railroads  in  r&aesachusetts  are  covered  by  the  so-called  "General 
Corporation  Ta  \."  In  thefirsl  place,  railroads,  like  all  other  companies 
organized  under  the  general  or  Bpecial  laws  providing  for  incorporation, 

;,,-,.  ;i ,.,i  hy  the  local  authorities  on  their  "real  estate,   machinery 

and  merchandise,"  or  whatever  property  they  have  which  would  be 
liable  to  taxation  if  owned  by  "a  natural  person  resident  in  the  com- 
monwealth," and  pay  the  taxes  thereon  direct  to  the  town-  or  cities  in 
which  Buch  property  is  found.  In  the  second  place,  the  State  Tax 
Commissioner  values  the  entire  capital  stock  of  all  corporation.-,  includ- 
ing railroads,  at  it-  market  value,  if  that  can  be  ascertained,  or  at  it- 
fair  cash  value  as  learned  from  reports  required  of  the  corporations,  or 
by  inspection  of  books  and  property,  if  necessary.  The  State  then 
Levies  a  tax  on  the  excess  of  the  value  of  the  aggregate  shares  of  capital 
stock  over  the  value  of  the  real  estate,  etc.,  taxed  locally.  This  has 
sometimes  been  called  the  "corporate  excess."  The  municipalities  may 
not  tax  the  stock  nor  share-  therein.  In  the  case  of  railroads  lying 
only  partly  in  the  State  the  tax  is  on  that  portion  of  the  stock  which  is 
proportional  to  the  length  of  that  part  of  the  line  lying  within  the 
State.  The  rate  of  this  tax  is  the  average  rate  of  all  taxes  on  property 
in  the  State.  By  a  recent  amendment  to  the  law  the  assessment  of  this 
"corporate  excess,"  or  the  value  of  the  corporate  franchise,  as  fixed  by 
the  Tax  Commissioner  for  the  State  tax,  may  not  exceed  20%  of  the 
value  of  the  real  estate,  etc.,  locally  assessed.  The  tax  is  paid  into  the 
State  treasury,  hut  if  any  shareholders  reside  in  Massachusetts  the  tax 
collected  on  the  proportion  of  the  total  shares  so  owned  is  remitted  to 
the  towns  where  such  shareholders  live,  the  balance  being  retained  by 
the  State. 

The  able  Special  Tax  Commission  of  Massachusetts,  which  reported 
in  L897,  had  nothing  hut  the  highest  praise  for  the  general  corporation 
tax  of  that  State.     It  said: 

The  corporate  excess  is  taxed  at  a  uniform  rate  by  the  State.  The  taxes  are  regular 
and  certain.  They  are  heavy  and  they  yield  a  large  revenue.  *  *  *  Yet  little  com- 
plaint ia  heard  regarding  these  taxes  a  signal  proof  that  the  taxpayers  accommodate 
themselves,  if  not  with  ease,  at  least  without  severe  complaint,  to  hardens  which  are 
steady,  regular,  predictable,  and  for  which  in  consequence  they  are  able  to  make  calcu- 
lations and  adjust  their  affairs. 

The  corporation  lav  is  particularly  simple  and  is  ascertained  with  unerring  exact- 
ness, in  the  case  of  large  and  well-known  corporations,  whose  shares  aTre  regularly  dealt 
in.  and  consequently  have  a  publicly  recorded  value.  *  *  *  As  a  whole,  this  part  of 
our  tax  system  i-  an  excellent  example  of  the  method  of  taxing  corporations  at  the 
gource,  and  of  refraining  from  any  dealings  with  the  individual  holder  of  corporate 
securities — a  method  admitted  on  all  hands  to  be  the  simplest,  most  efficient,  and  most 
eijuitahle  in  the  taxation  of  corporate  property. ' 


'Report  Mass.  Com.  1897,  pp.  88  70. 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  115 

The  only  feature  of  the  law  which  the  Commission  criticised  was  that 
which  provides  for  the  distribution  of  the  taxes  to  the  towns  where 
shareholders  reside,  an  arrangement  which  often  gave  some  towns  a 
revenue  from  property  which  enjoyed  the  protection  of  government  in 
other  towns. 

The  Ontario  Commission  on  Taxation  of  Railways,  of  1904,  had  this 
to  say  of  the  Massachusetts  system  after  an  actual  visit  to  the  State 
and  conference  with  tax  oflicials  and  others: 

It  is  in  cessary  to  observe,  however,  that  though  this  system  works  quite  satisfactorily 
in  Massachusetts,  one  can  hardly  conceive  of  its  doing  so  in  most  of  the  other  states. 
Its  successful  operation  depends  very  largely  upon  historic  conditions,  and  especially 
upon  the  stringency  of  the  Massachusetts  laws  with  reference  to  the  organization  of 
railroad  and  other  corporations,  and  which  insure  a  bona  fide  payment  in  full  of  the 
ordinary  shares,  a  limitation  of  the  issue  of  mortgage  bonds,  etc.  These  conditions  dis- 
courage any  speculative  manipulation  of  stock  and  encourage  the  holding  of  it  as  a 
normal  investment  for  dividends.  It  is  always  possible,  therefore,  to  very  nearly 
arrive  a!  the  real  value  of  the  railroad  property  by  taking  the  number  and  value  of  the 
shares  of  railway  stock.     The  bonds  of  railway  companies  are  not  taxed. 

By  an  old  decision  of  the  courts  all  railways  in  Massachusetts  are 
exempt  from  local  taxation  on  their  right  of  way  which  is  arbitrarily 
defined  as  a  strip  five  rods  wide.  Everything  outside,  even  portions  of 
buildings  outside,  is  taxed  locally. 

Tlie  .Massachusetts  system  is  absolutely  inapplicable  in  California. 
In  Massachusetts  railroads  are  financed  largely  on  the  basis  of  stock, 
so  that  bonds  take  a  secondary  place.  This  is  practically  the  reverse 
of  the  California  method  of  financing  railroads.  Thus  the  Boston  and 
Albany  Railroad,  a  typical  road,  has  .$25,000,000  of  capital  stock  which 
pays  8  j  dividends,  the  dividends  being  guaranteed  by  the  New  York 
Central  and  Hudson  River  Railroad,  hence  this  stock  is  worth,  presum- 
ably, about  $50,000,000;  it  has  only  $8,485,000  of  bonds.  The  Southern 
Pacific  Railroad  is  bonded  for  $93,682  500;  the  stock  pays  no  dividends 
and  is  a  problematical  value,  practically  all  of  it  being  in  the  treasury 
of  the  Southern  Pacific  Company.  It  has  no  market  or  ascertainable 
price.  Of  the  $12,500,000  of  net  earnings,  $10,500,000  go  for  fixed 
charges  and  only  $2,000,000  is  surplus.  Assuming  that  all  of  this  could 
be  used  for  dividends,  which  is  an  extreme  assumption,  the  stock  would 
not  be  worth  over  $30,000,000.  In  Massachusetts,  then,  the  stock  is  to 
the  bonds  as  6  to  1;  in  California  as  1  to  3.  Taxing  Massachusetts 
railroads  on  the  basis  of  stock  gives  them  an  abatement  of  one  seventh 
— or.  in  other  words,  is  equivalent  to  a  valuation  of  their  property  at 
six  seventh-  of  its  true  value,  which  is  probably  a  higher  proportion 
than  is  taken  of  other  property,  but  the  same  process  applied  in  Cali- 
fornia would  nsult  in  an  assessment  at  not  over  one  fourth  the  true 
value,  and  probably  much  less.  Hence  the  Massachusetts  system  could 
not  be  used  in  California. 


116  REPORT  OP  COMMISSION    ON   REVEN1  E   AND  TAXATION. 

Pennsylvania. 

\-  will  be  seen  from  the  table,  copied  above  from  the  Interstate 
Commerce  Commission,  Pennsylvania  levies  on  railroads  four  of  the 
different  kinds  of  taxe-  i.  ■  f .  ■  i- 1- » 1  to.  But  the  largest  revenues  are  derived 
from  the  tax  on  the  capital — the  stock  and  the  bonds. 

As  in  Massachusetts,  so  in  Pennsylvania,  there  is  a  general  corpora- 
tion tax  which  covers  railroads  as  well  as  all  other  classes  of  corpora- 
tions.    This  falls  into  three  parts: 

1.  A  tax  on  capital  stock,  at  the  rate  of  5  mills. 

2.  A  tax  on  loan-,  held  by  residents,  at    1  mills. 

3.  A  tax  on  gross  receipts,  at  8  mills. 

The  last  available  report  of  the  Auditor-General,  which  is  for  1903, 

gives  the  following  tax  receipts  from  steam  railroads: 

1.  The  tax  on  capital  stock $2,951,296  86 

•J.    The  tax  on  loans... 823,359  65 

3.  The  tax  on  gross  receipts 710,320  37 

4.  Bonus  (incorporation  tax.  not  annual ) 321,444  78 

Total.... $4,806,421  66 

The  tax  on  the  capital  stock  and  the  tax  on  loans  originally  went 
together  and  formed  a  symmetrical  whole,  covering  all  the  capital  used 
by  the  corporations,  and  both  were  paid  by  the  corporations.  They 
were  designed  to  be  a  tax  on  the  corporations  measured  by  the  capital 
employed.  But  the  courts  decided  that  the  State  could  not  tax  bonds 
held  by  persons  not  residing  in  Pennsylvania.  Hence,  the  tax,  being 
paid  by  the  roads,  only  on  behalf  of  resident  bondholders,  falls  very 
unequally  upon  different  roads,  and  non-resident  bondholders  pay 
no  taxes,  although  the  property  which  secures  their  investment  enjoys 
the  protection  of  the  State. 

Through  the  decisions  of  the  courts,  therefore,  the  Pennsylvania  tax 
on  capital  is  a  stock  tax  closely  analogous  to  the  Massachusetts  tax. 
The  same  objections  to  its  use  in  California  apply  to  the  Pennsylvania 
tax  that  were  raised  against  the  Massachusetts  tax. 

The  Pennsylvania  gross  receipts  tax  on  railroads  will  be  discussed  in 
t  he  next  sect  ion. 

3.  Taxes  based  on  earnings. 

Tin    gross  receipts  tax  is  the  principal  tax  on  railroads  in   .Maine, 

Maryland.    Minnesota,    and    Vermont.      It    is    used    in    conjunction    with 

other  taxes  in  New  York.  Ohio,  Pennsylvania,  and  it  has  recently  been 
introduced  in  Virginia  as  a  supplementary  tax,  and  to  a  very  limited 
extent  in  Texas.  It  was  the  principal  tax  on  railroads  in  Michigan 
and  Wisconsin   Cor  many  years,  bu1   has  recently  been  abandoned  in 

those  s1ate>  in  favor  of  the  ad  valorem  tax  on  property.  It  is  applied 
in  Illinois  to  the  Illinois  Central  Railroad  Company  only.  North 
Carolina  and   North   Dakota  each  had.  some  years  ago,  a  gross  earnings 


REPORT   OF    COMMISSION    ON    REVENUE    AND    TAXATION.  117 

tax  as  an  alternative  to  the  property  tax.     But  these  have  fallen  into 

disuse. 

The  Virginia  railroads  were  formerly  taxed  on  their  net  earnings, 
the  tax  being  a  part  of  the  general  income  tax  of  that  State.  This  has 
been  abandoned  recently  in  favor  of  the  gross  earnings  tax.  Delaware 
has  a  aet  earnings  tax  on  the  statute  books,  but  does  not  appear  to 
derive  any  revenues  therefrom. 

To  sum  up : 

4  States  use   the  gross   earnings  tax  as   the  chief  tax   on   railroads. 

5  States  use  the  gross  earnings  tax  to  supplement  other  taxes. 
2  States  have  recently  abandoned  the  gross  earnings  tax. 

1  State  has  recently  adopted  the  gross  earnings  tax. 
1  State  uses  the  gross  earnings  tax  for  one  railroad. 

13  States  use  or  have  used  a  gross  earnings  tax  on  railroads. 

Is  a  gross  earnings  tax  constitutional? 

The  opinion  is  often  expressed  in  tax  commission  reports  and  else- 
where that  a  tax  on  the  gross  earnings  of  railroads,  in  so  far  as  those 
earnings  are  derived  from  interstate  commerce,  is  of  doubtful  validity 
under  provisions  of  the  Federal  Constitution.  This  view  is  very  forcibly 
expressed  by  the  Ontario  Commission  on  Railway  Taxation,  1905, 
which,  however,  brought  in  a  very  strong  report  in  favor  of  the  gross 
earnings  tax  on  broad  general  grounds.  Their  recommendation  applied, 
of  course,  to  Canada,  where  the  constitutional  difficulties  referred  to 
could  not  apply.  The  Ontario  Commission,  after  saying  that  "The 
earning  power  is  the  only  reliable  and  satisfactory  basis  of  taxation," 

alleged: 

In  the  United  States,  however,  owing  to  the  wording  and  interpretation  of  the  Con- 
stitution, it  is  held  by  the  courts  that  taxation  by  any  State  of  the  earnings  of  a  railroad 
derived  from  interstate  traffic  is  illegal.  Consequently,  even  where  the  earnings  of  a 
railroad  are  made  the  basis  of  taxation,  the  tax  laws  are  careful  to  state  that  the  tax  is 
a  license  tax  or  a  franchise  tax.  merely  measured  by  gross  earnings;  and  it  is  often 
farther  guarded  by  some  such  qualifying  clause  as,  "derived  entirely  from  traffic  within 
the  State."  In  several  state-  where  the  gross  earnings  tax  is  accepted  by  both  the  people 
and  the  railways,  it  is  thought  that  the  law  is  not  really  constitutional,  but,  as  neither 
party  cares  to  bring  the  matter  to  a  test,  it  is  permitted  to  stand.  In  Wisconsin,  the 
gross  earnings  tax,  lately  abolished,  was  declared  by  several  judges  to  be  unconstitu. 
tional.  but  they  refused  to  give  judgments  adverse  to  the  state  on  account  of  the  confu- 
sion which  would  be  introduced  into  the  State  revenue. 

When  such  states  as  Michigan  and  Wisconsin,  which  had  previously  taxed  the  rail- 
roads on  the  gross  earnings  basis,  reached  the  conviction  that  the  railroads  were  not 
paying  as  much  as  they  might  be  made  to  pay,  we  find  that,  instead  of  simply  raising 
the  rate  of  t  lie  existing  tax  from,  say  four,  to  say  live  or  six  percent,  they  found  it  expe- 
dient to  change  the  basis  of  taxation.  This  was  obviously  done  because  they  knew  that 
the  raising  of  the  rate  would  meet  with  the  opposition  of  the  railroads  and  would  prob- 
ably result  in  the  tax  Law  being  declared  unconstitutional,  thereby  paralyzing  a  large 
section  of  the  revenue  of  the  State  until  a  new  method  of  taxation  should  be  adopted. 
Yet.  as  already  indicated,  and  as  an  examination  of  its  operation  will  show,  the  so-called 
ad  valorem  system  of  these  and  other  states  is  really  a  roundabout  method  of  getting  at 
earnings  once  more  on  a  higher  rate  of  taxation.* 

♦Report  of  Ontario  Commission  on  Railway  Taxation,  1905,  pp.  16-17. 


11s  REPORT  OF   COMMISSION   ON    REVBN1  I.    \M>  TAXATION. 

This  view,  as  forcibly  expressed  by  the  Ontario  Commission,  has 
been  sedulously  spread  by  certain  railroad  attorneys  and  is  Bomewhat 
extensively  held  in  the  United  States,  bu1  it  does  no1  accord  with  the 
decisions  <>f  the  Supreme  Court.  The  following  analysis  of  the  long 
series  of  interesting  decisions  upon  this  point  will  Bhow  :it  once  where 
the  erroneous  -pinion  arose  and  what  the  Supreme  Court  now  holds: 


The  constitutionality  of  a  tax  on  the  gross  receipts  of  corpora- 
tions engaged  in  interstate  commerce. 

In  writing  the  following  synopsis  of  the  decisions  of  the  Supreme  Court  as  to  the 

power  of  the  states  to  tas  interstate  carriers  we  have  worked  directly  from  the  United 

es  Reports.    Much  assistance  was,  however,  found  in  the  admirable  treatise  by 

Frederick  X.  Judson,  oi  the  8t  Louis  Bar,  on  The  Power  of  Taxation,  State  and  Federal, 

in  the  United  States:  St.  Louis,  1903,  especially  Chapters  III,  VII  and  VIII. 

Mr.  Treadwell  went  over  the  cases  Brs1  and  formulated  the  conclusions  reached. 

<  )f  the  Beveral  provisions  of  the  Federal  Constitution  intended  jointly 
to  safeguard  "the  freest  interchange  of  commodities  among  the  people 
of  the  different  Btates  "*  the  one  chiefly  relied  upon  in  connection  with 
the  taxation  of  carriers  engaged  in  interstate  commerce  is  paragraph 
3,  of  Section  8,  of  Article  I,  which  confers  upon  Congress  the  power: 
"To  regulate  commerce  with  foreign  nations,  and  among  the  several 
states,  and  with  the  Indian  tribes." 

The  dictum  of  Chief  Justice  Marshall  in  McCulloch  vs.  Maryland, 
"  that  the  power  to  tax  involves  the  power  to  destroy,  etc.,"  was  deliv- 
ered solely  with  reference  to  the  taxation  of  the  ''instruments  employed 
by  the  Government  in  the  execution  of  its  powers,"  and  no  attempts  to 
apply  it  as  a  prohibition  of  State  taxation  of  interstate  carriers,  even 
when  they  are  incorporated  by  the  United  States,  have  been  successful. f 

The  difficulty  of  drawing  a  sharp  line  between  the  Federal  powers 
and  the  State  powers  in  the  matter  of  the  taxation  and  regulation  of 
those  great  agencies  of  interstate  commerce,  like  the  railroads  and  the 
telegraph,  which  extend  from  one  end  of  the  country  to  the  other,  has 
troubled  the  courts  since  1872.  It  is  only  recently  thai  the  problem 
has  been  definitely  Bolved. 

While  the  greater  pari  of  each  of  the  two  fields,  in  which  each  of  the 
two  greal  divisions  of  our  Government  may  respectively  exercise  its 
powers,  i-  clear  enough,  yel  the  boundary  of  one  seems  to  merge  almost 
imperceptibly  into  thai  of  the  other  a1  places.  This  has  resulted  in 
much  litigation,  and  the  decisions  of  the  Supreme  Court  on  some  of  the 
most  vital  point-  have  occasionally  seemed  contradictory.  In  not  a 
few  instances  the  Court  has  apparently  reversed  Itself. 

•  Justice  Miller  in  Cook  vs.  Penn.,  97  f.  s.,  574. 

t  Thompson  vs.  Pacific  Railroad,  9  Wallace  679;  Railroad  Co.  \-.  Peniston,  L8  Wallace,5* 


REPORT   OF    COMMISSION    ON    REVENUE    AND   TAXATION.  119 

However,  the  following  points  seem  now  to  have  been  conclusively 
settled: 

A.  As  to  the  taxation  of  interstate  carriers  on  an  ad  valorem  basis: 

1.  A  State  may  tax  the  property,  within  its  1k.uii.1s.  of  railroad  com- 
panies and  other  persons  or  corporations  engaged  in  interstate  com- 
merce. 

Railroad  Co.  vs.  Peniston,  18  Wallace,  5,  and  later  cases  based 

thereon. 

2.  It  may  tax  both  the  tangible  and  the  intangible  property  of  the 
carriers,  provided  only,  that  it  may  not  tax  a  Federal  franchise. 

Central  Pacific  11.  R.  Co.  vs.  California,  162  U.  S.  91. 
:',.  A  State  may  value  that  property  by  the  "unit  rule,"  i.  e..  make  a 
valuation  of  the'  entire  property  of  the  "  system  "  of  a  given  corpora- 
tion engaged  in  interstate  business,  and  tax  that  proportion  of  the  entire 
propertv  which  the  mileage  in  the  State  bears  to  the  total  mileage  oper- 
ated. Or.  what  is  the  same  thing,  may  make  the  apportionment  on  the 
basis  of   business  done. 

State  Railroad  Tax  Cases,  92  U.  S.  575; 

Western  Union  Telegraph  Co.  vs.  Taggert,  163  U.  S.  1; 

Adams  Express  Co.  vs.  Ohio,  165  U.  S.  194. 

4.  It  may  arrive  at  a  valuation  by  the  following  methods: 
(a)  By  adding  the  market,  or  fair  cash,  value  of  the  shares  of  capital 
stock  and   the  market,  or  par,  value   of  the  various  kinds  of  funded 
indebtedness. 

Justice  Miller,  in  rendering  an  oft-quoted  decision  on  this  point,  said: 
"  It  is  therefore  obvious  that,  when  you  have  ascertained  the  current 
cash  value  of  the  whole  funded  debt,  and  the  current  cash  value  of  the 
entire  number  of  shares,  you  have,  by  the  action  of  those  who  above  all 
others  can  best  estimate  it,  ascertained  the  true  value  of  the  road,  all 
its  property,  its  capital  stock,  and  its  franchises;  for  these  are  all  repre- 
sented by  the  value  of  its  bonded  debt  and  of  the  shares  of  its  capital 

stock." 

He  added  that  this  would  be  perhaps  the  fairest  basis  of  taxation  for  the 
State  at  large,  if  all  railroads  were  solvent  and  paid  the  interest  promptly 
on  their  funded  debt;  bu1  that  this  was  not  the  case.  Thesystem  adopted 
by  the  statute  of  Illinois  and  the  rule  of  the  board  preserved  the  princi- 
ple of  taxing  all  the  tangible  property  at  its  value,  and  then  taxing  tin' 
capital  stock  and  franchise  at  their  value,  if  there  was  any.  after  deduct- 
ing the  value  of  the  tangible  property. 

State  Railroad  Tax  Cases,  92  U.  S.  575. 

(h)  By  considering  one  or  more  of  several  elements,  or  evidences  of 
value,  as:  the  cost  of  construction  or  equipment,  the  market  value  of 


120  REPORT  OP  COMMISSION  ON    KEVENUB   AND  TAXATION. 

the  outstanding  securities,  the  gross  earnings  and  the  net  earnings, -and 
nil  other  matters  appertaining  thereto. 

Indiana  Railroad  Cases,  154  V.  S.  121  and  439. 

5.  The  courl  has  recognized  the  fact  that  the  value  of  property  of 
this  class  depends  Largely  on  the  earnings.  In  some  of  the  decisions 
already  referred  to  this  is  mud''  clear.     Thus  in  the  Indiana  Railroad 

Tax  i  '<!■■•  8  (  p.  445)  it  was  said: 

"The  rule  of  property  taxation  is  that  the  value  of  the  property  is 
the  basis  of  taxation.  It  dors  not  mean  a  tax  upon  the  earnings  which 
the  property  makes,  nor  for  the  privilege  of  using  the  property,  hut  rests 
solely  upon  the  value.  Bui  the  value  of  property  results  from  thr  us<  to 
which  it  is  /mi  and  varies  with  the  profitableness  of  that  use, present  and 
prospective,  actual  and  anticipated.  There  is  no  pecuniary  value  outside 
of  that  which  results  from  such  use.  The  amount  and  profitable  char- 
acter of  such  use  determines  the  value,  and  if  property  is  taxed  nt  its 
actual  cash  value,  it  is  taxed  upon  something  which  is  created  by  the  uses 
to  which  it  is  put.  In  the  nature  of  things  it  is  prani  rally  impossible — 
at  least  in  respect  to  railroad  property — to  dividt  its  value,  and  deter- 
mine how  much  is  caused  by  one  use  to  which  it  is  put  and  how  much  by 
another.  Tale  the  case  Injure  us;  it  is  impossible  t<>  disintegrate  the 
value  of  thai  portion  of  the  road  within  Indiana  and  determine  howmueh 
of  thai  value  springs  from  its  use  in  doing  interstate  business,  and  how 
much  from  its  use  in  doing  business  wholly  within  th<  Slate.  An  attempt 
to  do  so  would  be  entering  upon  a  men  field  of  uncertainty  and  specula- 
tion. And  because  of  this  fart  if  is  something  which  an  assessing  hoard 
is  not  required  to  atti  mpt." 

B.     As  to  th<-  taxation  of  carriers  or  of  interstate  business  by  methods 
other  than  the  property  or  ad  valorem  tax: 

1.  A  State  may  not  levy  a  license  tax  as  a  prerequisite  in  carrying 
on  interstate  businc— . 

In  Osborne  vs.  Mobile.  16  Wallace  17'.',  decided  in  1S72.  the  Supreme 
Court  decided  that  this  could  be  done.  But  fifteen  years  later  that  case 
was  overruled  in  Leloup  vs.  Mobile,  127  U.  S.  t'.io.  The  trenchant  part 
of  this  decision  reads: 

"A  great  number  and  variety  of  cases  involving  the  commercial 
power  of  ( 'om_rres-  have  been  brought  to  the  attention  of  this  court  dur- 
ing the  past  fifteen  years  which  have  frequently  made  it  necessary  to 
re-examine  the  whole  subject  with  care:  ami  the  result  has  sometimes 
been  that  in  order  to  give  full  and  fair  effect  to  the  different  clauses  of 
the  Constitution,  the  court  has  felt  constrained  to  refer  to  the  funda- 
mental principles  stated  and  illustrated  with  so  much  clearness  and 
force  hy  chief  Justice  Marshall  and  other  members  of  the  court  in 
former  times,  and  to  modify  in  -dine  degree  Certain  dicta  and  decisions 


REPORT   OF    COMMISSION    ON    REVENUE   AND   TAXATION.  121 

which  have  occasionally  been  made  in  the  intervening  period.  This  is 
always  done,  however,  with  great  caution,  and  an  anxious  desire  to 
place  the  final  conclusion  reached  upon  the  fairest  and  most  just  con- 
structions of  the  Constitution  in  all  its  parts." 

The  conclusion  was,  therefore  (1.  c,  page  648),  "that  no  State  has 
the  right  to  lay  a  tax  on  interstate  commerce  in  any  form,  whether  by 
way  of  duties  laid  on  the  transportation  of  the  subjects  of  that  com- 
merce, or  on  the  receipts  derived  from  that  transportation,  or  on  the 
occupation  or  business  of  carrying  it  on,  and  the  reason  is  that  such 
taxation  is  a  burden  on  that  commerce  and  amounts  to  a  regulation  of 
it,  which  belongs  solely  to  Congress." 

See,  also:   Webster  vs.  Bell,  68  Fed.  183; 

McCall  vs.  California,  136  U.  S.  104; 

Norfolk  and  Webster  R.  Co.  vs.  Penn.,  136  U.  S.  114; 

Crutcher  vs.  Kentucky,  141  U.  S.  47. 

2.  A  State  may  levy  a  license  tax  on  local  or  interstate  business 
performed  by  interstate  carriers. 

Osborne  vs.  Florida,  164  U.  S.  650; 

Postal  Telegraph  Cable  Co.  vs.  Adams,  155  U.  S.  688. 

3.  A  State  may  not  tax  freight,  in  interstate  commerce,  nor  inter- 
state telegraph  messages. 

State  Freight  Tax  Case,  15  Wallace,  232; 
Telegraph  Co.  vs.  Texas,  105  U.  S.  460. 

4.  A  State  may  levy  a  tax  in  proportion  to  the  gross  receipts  from 
interstate  commerce  under  certain  conditions  and  in  certain  forms. 
But  may  not  tax  the  receipts  as  such. 

The  earliest  case  involving  this  point  seems  to  be  one  decided  in  1872, 
at  about  the  same  time  that  the  State  Freight  Tax  case,  above  referred 
to,  was  decided.  This  is  known  as  "The  State  Tax  on  Gross  Receipts," 
15  Wallace,  284. 

The  State  of  Pennsylvania  levied  a  three  fourths  of  one  per  cent  tax 
on  the  gross  earnings  of  every  railroad  incorporated  under  its  laws,  and 
the  tax  was  held  valid,  even  when  it  covered  the  earnings  of  a  State 
railroad  on  coal  carried  out  of  the  State. 

This  case  was  distinguished  from  the  State  Freight  Tax  case  on 
the  ground  that  not  everything  which  affects  commerce  amounts  to  a 
regulation  of  it  within  the  meaning  of  the  Constitution. 

The  court  said,  in  words  that  often  reappear  in  the  later  decisions  on 
the  same  point,  after  showing  that  the  states  have  authority  to  tax  the 
property,  real  and  personal,  of  all  corporations  whether  engaged  in 
interstate  commerce  or  not: 

"We  think  also  that  such  tax  may  be  laid  upon  a  valuation,  or  may 
•be  an  excise,  and  that  in  exacting  an  excise  tax  from  their  corporations, 


122  REPORT  OF   COMMISSION    ON    REVEN1  E    \NI>   TAXATION. 

the  Btates  are  Dot  obliged  to  impose  a  axed  Bum  upon  the  Franchisee  or 
upon  the  value  of  them,  but  they  may  demand  a  graduated  contribu; 
tion,  proportioned  either  to  the  value  of  the  privileges  granted,  or  to 
the  extent  of  their  exercise,  or  to  the  results  of  such  exercise.  There 
certainly  is  m  line  which  separates  that  power  of  the  Federal  Govern- 
ment to  regulate  commerce  among  the  states,  which  is  exclusive,  from 
the  authority  of  the  Btates  to  tax  a  person's  property,  business,  or  occu- 
pation, within  their  limits.  The  line  is  sometimes  difficult  to  define 
with  distinctness.  It  is  so  in  tin'  present  case;  but  we  think  it  may 
safely  be  laid  down  that  the  gross  receipts  of  railroad  or  canal  compa- 
nies, after  they  have  reached  the  treasury  of  the  carriers,  though  they 
may  have  been  derived  in  part  from  transportation  of  freight  between 
Btates,  have  become  Bubject  to  legitimate  taxation." 
In  commenting  on  these  decisions.  Mr.  Judson  Bays: 
'l  It    seems    to    have    been  conceded    that    a  State  can    levy  a  tax  upon 

net  earnings,  and  the  court  said  that  it  is  difficult  to  state  any  well- 
founded  distinction  between  a  State  tax  upon  net  earnings  and  one 
upon  grose  earnings,  that  net  earnings  are  a  part  of  the  gross  receipts, 
ami  that  the  gross  recipis  are  a  measure  of  approximate  value. 

"  Neither  of  these  cases  has  been  overruled;  but  the  authority  of  the 
decision  in  the  case  of  the  State  Tax  on  Gross  Receipts  was  for  a  time 
seriously  impaired  by  decisions  of  the  court  apparently  inconsistent 
with  the  broad  statement  therein  of  the  right  to  tax  gross  receipts,  on 
the  ground  that  they  have  passed  into  the  treasury  of  the  company  and 
lost  their  distinctive  character  as  freight."* 

''It  will  be  noticed  that  the  mileage  rule  of  apportionment  of  inter- 
state properties  was  not  suggested  or  considered  in  the  case  of  the  State 
Tax  on  Gross  Receipts.  The  case  presented  was  that  of  a  railroad 
whose  line  was  entirely  within  the  State,  hut  which  did  an  interstate 
business  through  its  connections  with  other  lines  leading  out  of  the 
State." 

We  come  now  to  a  series  of  cases  in  which  a  State  tax  on  gross 
receipts  from  interstate  trade  has  heen  held  invalid.  The  first  in  Fargo 
vs.  Michigan,  121  U.  S.  230.  The  Merchants1  Despatch  Transportation 
Company,  a  New  York  corporation,  owned  certain  cars  which  it  leased 
to  the  railroad  com  panics  which  operated  them.  The  State  of  Michigan 
.!--•  ssed  a  tax  on  the  gross  receipts  of  that  company  in  the  State  meas- 
ured by  the  unit  rule  and  based  on  receipt-  from  the  transportation  of 
freight  from  points  without  to  points  within  the  State  and  from  points 
within  to  points  without,  hut  did  not  tax  the  receipts  from  husiness  pass- 
ing entirely  through  the  State.  This  case  was  distinguished  from  the  Kail- 
way  Gross  Receipts  Case  (which  it  did  not  distinctly  overrule)  on  the 
ground-  (  1  )  that  the  Merchants'  Despatch  was  not  a  Michigan  corpora- 
See  Bteanish!),  Co.  vs.  Pennsiilrnn'm,  122  U.  S.  32«;  Fargo  vb.  Michigan,  121  U.  8.  230* 


REPORT   OF    COMMISSION    ON    REVENUE    AND    TAXATION.  1-3 

tion,  and  (2)  that  in  the  Pennsylvania  ease  the  money  was  in  the 
treasury  of  the  company  in  that  state,  while  in  the  Michigan  case  the 
money  for  the  freight  was  probably  never  in  that  State  and  hence  not 
property  subject  to  taxation. 

In  the  next  term  of  the  court  the  theory  that  gross  receipts  could  not 
be  taxed  was  more  fully  developed  in  the  case  of  the  Philadelphia 
Steamship  Co.  vs.  Pennsylvania,  122  U.  S.  326.  In  this  ease  Pennsyl- 
vania had  attempted  to  impose  a  tax  on  the  gross  receipts  of  railroads, 
canal,  steamboat,  and  other  transportation  companies.  The  steamship 
company  in  question  was  a  Pennsylvania  corporation  running  steamers 
between  Philadelphia  and  Savannah  and  from  New  Orleans  to  foreign 
ports.  The  court  held  that  interstate  commerce  carried  on  by  ships 
at  sea  is  national  in  character  and  must  be  covered  by  one  general  rule. 
The  court  said: 

"If,  then,  the  commerce  carried,  on  by  the  plaintiff  in  error  in  this 
case  could  not  be  constitutionally  taxed  by  the  State,  could  the  fares 
and  freights  received  for  transportation  in  carrying  on  that  commerce 
be  constitutionally  taxed?  If  the  State  can  not  tax  the  transportation, 
may  it,  nevertheless,  tax  the  fares  and  freights  received  therefor? 
Where  is  the  difference?  Looking  at  the  substance  of  things,  and  not 
at  mere  forms,  it  is  very  difficult  to  see  any  difference.  The  one  thing 
seems  to  be  tantamount  to  the  other.  It  would  seem  to  be  rather 
metaphysics  than  plain  logic  for  the  State  officials  to  say  to  the  com- 
pany: 'We  will  not  tax  you  for  the  transportation  you  perform,  but  we 
will  tax  you  for  what  you  get  for  performing  it.'  Such  a  position  can 
hardly  be  said  to  be  based  on  a  sound  method  of  reasoning. 

"  No  doubt  a  ship-owner,  like  any  other  citizen,  may  be  personally 
taxed  for  the  amount  of  his  property  or  estate,  without  regard  to  the 
source  from  which  it  was  derived,  whether  from  commerce,  or  banking, 
or  any  other  employment.  But  that  is  an  entirely  different  thing 
from  laying  a  special  tax  upon  his  receipts  in  a  particular  employment. 
If  such  a  tax  is  laid,  and  the  receipts  taxed  are  those  derived  from 
transporting  goods  and  passengers  in  the  way  of  interstate  or  foreign 
commerce,  no  matter  when  the  tax  is  exacted,  whether  at  the  time  of 
realizing  the  receipts,  or  at  the  end  of  every  six  months  or  a  year,  it  is 
an  exaction  aimed  at  the  commerce  itself,  and  is  a  burden  upon  it,  and 
seriously  affects  it.  A  review  of  the  question  convinces  us  that  the 
first  ground  on  which  the  decision  in  State  Tax  on  Railway  Gross 
Receipts  was  placed  is  not  tenable;  that  it  is  not  supported  by  anything 
decided  in  Brown  vs.  Maryland;  but  on  the  contrary,  that  the  reason- 
ing in  that  case  is  decidedly  against  it." 

On  the  basis  of  these  decisions  the  State  courts  quite  generally  held 
that  gross  receipts  of  carriers  in  interstate  commerce  could  not  be 
taxed. 


\24  REPORT   OF   COMMISSION    ON    REVEN1  B   ANl>   TAXATION. 

But  there  is  another  line  of  decisions  which  seem  to  modify  the 
rffict  of  the  line  running  from  Fargo  vs.  Michigan  without  expressly 
overruling  them.  These  connect  with  the  cases  sanctioning  the  taxa- 
tion of  property.  But  so  Ear  as  they  affect  the  question  of  the  actual 
measurement  of  a  State  tax  by  the  gross  receipts,  including  an  equi- 
table portion  of  the  receipts  from  interstate  commerce,  they  are  more 
recent  than  the  other  line  and  have  ended  in  such  emphatic  re-asser- 
tion that  they  si'i-ni  absolutely  conclusive. 

In  1881  Maine  inaugurated  a  tax  on  each  railroad  in  the  State 
entitled  -an  annual  excise  tax,  for  the  privilege  of  exercising  its 
franchises  and  the  franchises  of  its  leased  roads  in  the  State."  This 
tax  ''is  in  place  of  all  taxes  upon  such  railroad,  its  property  and 
Stock."  The  amount  of  this  tax  was  calculated  on  the  basis  of  the 
average  gros-  receipts  per  mile  of  road.  It  is  important  to  note  that 
the  tax  was  payable  in  April  and  was  computed  on  the  basis  of  gross 
receipt-  for  the  year  ending  June  30  in  the  preceding  year.  The 
following  provisions  covered  interstate  railroads: 

"When  a  railroad  lies  partly  within  and  partly  without  the  State, 
or  is  operated  as  a  part  of  a  line  or  system  extending  beyond  the  State, 
the  tax  shall  be  equal  to  the  same  proportion  of  the  gross  receipts  in 
the  State,  as  herein  provided,  and  its  amount  shall  be  determined  as 
follows:  the  gross  transportation  receipts  of  such  railroad,  line  or 
system,  as  the  case  may  be,  over  its  whole  extent,  within  and  without 
the  State,  shall  be  divided  by  the  total  number  of  miles  operated  to 
obtain  the  average  gross  receipts  per  mile,  and  the  gross  receipts  in  the 
State  shall  be  taken  to  be  the  average  gross  receipts  per  mile, 
multiplied  by  the  number  of  miles  operated  within  the  State." 

The  Grand  Trunk  Railroad  Company,  a  Canadian  corporation, 
operated  a  road  in  Maine,  which  it  leased,  and  became  subject  to  this 
tax.  The  railroad  opposed  the  tax  on  the  ground  that  the  case  of  the 
State  tax  on  gross  receipts  had  been  overruled  in  Fargo  vs.  Michigan, 
and  this  contention  was  sustained  by  the  United  States  court.  On 
appeal  to  the  Supreme  Court  the  decision  of  the  lower  court  was  reversed 
and  the  tax  was  held  to  be  valid.     The  court  said: 

"The  tax,  for  the  collection  of  which  this  action  is  brought,  is  an 
excise  tax  upon  the  defendant  corporation  for  the  privilege  of  exercising 
it.-  franchises  within  the  State  of  Maine.  It  is  so  declared  in  the 
statute  which    impose-  it;   nut!   that  (i   lax  of  this  rim  rurl rr  is   within   the 

<pow(  r  of  the  State  >>>  levy  there  run  be  no  question.  The  designation  does 
not  always  indicate  merely  an  inland  imposition  or  duty  on  the  con- 
sumption of  com  modi  ties,  bul  often  denotes  an  Impost  for  a  license  to 
pursue  certain  callings,  or  to  deal  in  special  commodities,  or  to  exercise 
particular  franchises.  It  is  used  more  frequently,  in  this  country,  in 
the   latter  sense  than    in   any  other.     The  privilege  of  exercising  the 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  125 

franchises  of  a  corporation  within  a  State  is  generally  one  of  value,  and 
often  of  great  value,  and  the  subject  of  earnest  contention.  It  is 
natural,  therefore,  that  the  corporation  should  be  made  to  bear  some 
proportion  of  the  burdens  of  government.  As  the  granting  of  the  privi- 
lege rests  entirely  in  the  discretion  of  the  State,  whether  the  corporation 
be  of  domestic  or  foreign  origin,  it  may  be  conferred  upon  such  con- 
ditions, pecuniary  or  otherwise,  as  the  State  in  its  judgment  may  deem 
most  conducive  to  its  interests  or  policy.  It  may  require  the  payment 
into  its  treasury,  each  year,  of  a  specific  sum,  or  may  apportion  the 
amount  exacted  according  to  the  value  of  the  business  permitted,  as 
disclosed  by  its  gains  or  receipts  of  the  present  or  past  years.  The 
character  of  the  tax,  or  its  validity,  is  not  determined  by  the  mode 
adopted  in  fixing  its  amount  for  any  specific  period  or  the  times  of  its 
payment.  The  whole  field  of  inquiry  into  the  extent  of  revenue  from 
sources  at  the  command  of  the  corporation  is  open  to  the  consideration 
of  the  State  in  determining  what  may  be  justly  exacted  for  the  privi- 
lege. The  rule  of  apportioning  the  charge  to  the  receipts  of  the^business 
would  seem  to  be  eminently  reasonable,  and  likely  to  produce  the  most 
satisfactory  results,  both  to  the  State  and  the  corporation  taxed. 

"The  court  below  held  that  the  imposition  of  the  taxes  was  a  regulation 
of  commerce,  interstate  and  foreign,  and  therefore  in  conflict  with  the 
exclusive  power  of  Congress  in  that  respect ;  and  on  that  ground  alone 
it  ordered  judgment  for  the  defendant.  This  ruling  was  founded  upon 
the  assumption  that  a  reference  by  the  statute  to  the  transportation 
receipts  and  to  a  certain  percentage  of  the  same  in  determining  the 
amount  of  the  excise  tax,  was  in  effect  the  imposition  of  the  tax  upon 
such  receipts,  and  therefore  an  interference  with  interstate  and  foreign 
commerce.  But  a  resort  to  those  receipts  was  simply  to  ascertain  the 
value  of  the  business  done  by  the  corporation,  and  thus  obtain  a  guide 
to  a  reasonable  conclusion  as  to  the  amount  of  the  excise  tax  which 
should  be  levied ;  and  we  are  unable  to  perceive  in  that  resort  any 
interference  with  transportation,  domestic  or  foreign,  over  the  road  of 
the  railroad  company,  or  any  regulation  of  commerce  which  consists  in 
such  transportation.  If  the  amount  ascertained  were  specifically  im- 
posed as  the  tax,  no  objection  to  its  validity  would  be  pretended.  And 
if  the  inquiry  of  the  State  as  to  the  value  of  the  privilege  were  limited 
to  receipts  of  certain  past  years  instead  of  the  year  in  which  the  tax 
is  collected,  it  is  conceded  that  the  validity  of  the  tax  would  not  be 
affected;  and  if  not.  we  do  not  see  how  a  reference  to  the  results  of  any 
other  year  could  affect  its  character.  There  is  no  levy  by  the  statute 
on  the  receipts  themselves,  either  in  form  or  fact  :  they  constitute,  as 
said  above.  Bimply  the  means  of  ascertaining  the  value  of  the  privilege 
conferred. 


126  REPORT  OP   COMMISSION    ON    REVEN1  B   AND   TAXATION. 

"The  case  of  Philadelphia  and  Southern  Steamship  Co.  vs.  Pennsyl- 
vania, 122  l'.  S.  :\-2\\.  in  qo  u:iv  conflicts  with  this  decision.  That  was 
the  case  of  a  tax,  in  terms,  upon  the  gross  receipts  of  a  steamship  com- 
pany, incorporated  under  the  Laws  of  the  State,  derived  from  the 
transportation  of  persons  and  property  between  different  states  and  to 
and  from  foreign  countries.  Such  tax  was  held,  without  any  dissent,  to 
be  a  regulation  of  interstate  and  foreign  commerce,  and.  therefore, 
invalid.  We  do  not  question  the  correctness  of  that  decision,  nor  do 
the  views  we  hold  in  this  case  in  any  way  qualify  or  impair  it." 

Maine  vs.  Grand  Trunk  Ry.  Co.,  142  U.  S.  217,  228. 

From  the  above  decision  four  justices  dissented,  which  was  regarded 
as  slightly  impairing  it-  authority.  But  in  Erie  R.  R.  Co.  vs.  Pennsyl- 
vania, 1")8  U.  S.  431,  the  same  principle  was  reaffirmed.* 

'The  most  recent  case  on  the  subject  is  Wisconsin  &  Michigan  Ry.  Co. 
vb.  Powt  rs,  191  U.  S.  379. 

The  right  of  the  State  to  levy  a  tax  on  the  gross  earnings  of  an  inter- 
state carrier  was  involved  in  this  case,  together  with  one  other  point  not 
connected  with  our  question. 

<>n  the  point  in  which  we  are  interested  the  court  said: 

UW(  need  say  but  a  word  in  answer  to  the  suggestion  that  the  tax  is  an 
wnconstitutional  interference  with  interstate  commerce.  In  form  the  tax 
is  a  tax  mi  'the,  property  and  business  of  such  railroad  corporation 
opewtiil  within  tiie  State,1  computed  upon  certain  percentages  of  gross 
income.  Tht  prima  facie  measure  of  the  plaintiff's  gross  income  is  sub" 
stantially  that  u-Jiirh  ims  approved  in  Maine  vs.  Grand  Trunk  Railway 
Co.,  1J2  U.  S.  217,228.  See  also  Western  Union  Telegraph  Co.  vs.  Tag- 
gart,  163  lr.  S.  J.     Decree  affirmed." 

This  was  a  unanimous  decision,  except  that  Mr.  Justice  White,  not 
having  heard  the  argument, took  no  part  in  the  decision.  He  concurred, 
however,  in  the  decision  in  Erie  Railroad  vs.  Pennsylvania,  a  case 
involving  the  same  points. 

It  appears,  then,  that  a  State  tax  on  the  property,  or  on  the  franchise, 
measured  by  the  gross  receipts  i-  valid  and  is  not  a  "regulation  of  inter- 
state commerce,"  in  the  Bense  in  which  the  right  to  regulate  commerce 
i-  prohibited  to  the  states  by  the  Constitution. 

•See,  also:  Lehigh  Valley  /.'.  R.  Co.  78.  Perm..  L45  U.  B.  L92;  Western  Union  Telegraph 
Co.  vs.  Taggart,  L63  U.  S.  1. 


REPORT   OF    COMMISSION    ON    REVENUE    AND    TAXATION.  127 

GROSS  EARNINGS  TAXES  IN  OTHER  STATES. 

1.  The  gross  earnings  tax  as  the  principal  tax. 

Maine. 

Many  of  the  leading  features  of  the  gross  receipts  tax  on  railroads 
;1s  levied  by  the  State  of  Maine  have  been  stated  above  in  the  citations 
from  Maim  vs.  Grand  Trunk  Bailimy  Co.,  142  U.  S.  217. 

The  tax  is  designated  "an  excise  tax,"  and  the  grass  receipts  upon 
which  it  is  levied  are  defined  as  the  average  receipts  per  mile  of  the 
entire  system  multiplied  by  the  number  of  miles  in  the  State.  The 
tax  thereon  is  in  lieu  of  all  other  taxes,  except  local  taxes  on  buildings. 

The  rates  are : 

On  gross  receipts  less  than  $1,500,  per  mile  %%. 

On  gross  receipts  from  $1,500  to  $2,000,  per  -mile  %%. 

For  each  additional  $500,  or  part  thereof,  %%  additional  up  to  4%. 

.Maine  received  $418,868  from  this  tax  in  1904,  or  about  $210  per 
mile  of  road.  The  local  taxes  are  small,  bringing  the  total  up  to. $219 
per  mile.  The  California  taxes  are  $317  per  mile.  The  low  taxes  per 
mile  are  due  to  the  low  rates  and  to  the  low  earnings  of  the  smaller 
roads.  The  Maine  Central  pays  about  $340  per  mile,  having  gross 
earnings  of  about  $8,500  per  mile. 

Maryland. 

Railroads  are  taxed  on  their  gross  earnings  for  State  purposes  and 
on  their  property  for  local  purposes.  The  taxable  gross  earnings  are 
defined  as  in  Maine,  as  the  average  earnings  per  mile  for  the  entire 
system  multiplied  by  the  number  of  miles  in  the  State. 

The  rates  are: 

S-10  of  1%  on  the  first  $1,000  per  mile. 
1%%  on  $1,000  and  $2,000  per  mile,  and 
2  '  on  all  earnings  over  $2,000  per  mile. 

This  complicated  method  of  stating  the  rates  obscures  the  real  effect 
of  the  tax.  The  average  of  taxes  paid  to  gross  earnings  is  1.4^r.  But 
the  average  is  reduced  by  the  fact  that  the  Baltimore  and  Ohio  enjoys 
a  lower  rate-,  namely,  i,L>%,  by  legislative  contract,  made  in  1872. 

The  tax  yields  about  $205  per  mile.  The  local  taxes  on  real  estate, 
roadbed,  etc.,  amount  to  about  $180  per  mile  more,  making  a  total  of 
$384  per  mile,  as  shown  in  table  above. 

Minnesota. 

In  Minnesota  the  tax  od  gross  earnings  has  been  in  use  thirty  years, 
and  is  generally  regarded  as  satisfactory.  It  is  in  lieu  of  all  other  taxes 
on  operative  property  and  is  a  State  tax.    The  definition  of  taxable  gross 


128  REPORT  OF  COMMISSION   ON  RK\  I  \i  B    AND   TAXATION. 

i  arnings  is  peculiar,  us  it  applies  the  anil  role  only  to  strictly  interstate 
business  "passing  through,  into,  or  out  of  the  State." 
The  two  most  important  sections  of  the  Act  are: 

tion  1.  Every  railroad  company  owning  or  operating  any  line  of  railway 
situated  within,  <>r  partly  within,  tliis  State,  shall,  during  the  year  L905,  and  annually 
thereafter,  paj  Into  the  treasury  of  this  Btate,  in  lieu  of  all  taxes  and  assessments 
on  all  property  within  this  Btate,  owned  or  operated  for  railway  purposes  by  such 
company,  Including  equipment,  appurtenances,  appendages,  and  franchises  thereof, 
um  of  money  equal  to  four  per  cent  of  the  gross  earnings  derived  from  the 
Operation  of  Bucb  line  <>l"  railway  within  this  State;  and  the  annual  payment  of 
such  sum  shall  lie  in  full  and  in  lieu  of  all  other  taxes  and  assessments  upon  the 
property  and  franchises  so  taxed. 

Section  2.  The  term  "gross  earnings  derived  from  the  operation  of  such  line 
of  railway  within  this  State."  as  used  in  Section  1  of  this  Act,  is  hereby  declared, 
and  shall  be  construed,  to  mean,  all  earnings  on  business  beginning  and  ending 
within  the  State,  and  a  proportion,  based  upon  the  proportion  of  the  mileage  within 
the  State  to  the  entire  mileage  over  which  such  business  is  done,  of  earnings  on  all 
interstate  business  passing  through,  into,  or  out  of  the  State. 

The  rate  was  made  4%  in  1904.  Before  that  it  was  1%  for  the  firsl 
three  years  of  operation,  2%  during  the  next  seven  years,  and  after 
ifii  years  3( ,  .  Before  the  change  in  rate  this  tax  was  yielding  a  revenue 
of  about  $2,000,000  per  annum.  The  new  rate,  and  the  increase  of 
railroad  earnings,  have  increased  this  to  over  $3,000,000.  The  Auditor 
of  State  reports  that  all  this  has  been  collected.  The  yield  is  nearly 
$400  per  mile. 

The  State  Auditor,  the  Honorable  S.  G.  Iverson,  gave  the  Ontario 
<  lommission  the  following  enthusiastic  endorsement  of  the  gross  earnings 
tax,  and  has  been  equally  strong  in  his  expressions  of  approval  in  letters 
tn  1  his  Commission  : 

We  believe,   in  this  State,  thai   the  gross  earnings  system   is  a   very  satisfactory 

method  of  taxing  the  railways.  Our  people  are  especially  well  satisfied  with  the 
system  of  taxation  on  gross  earnings,  because  they  think  it  is  the  fairest  way.  all 
things  considered.     Dnder  the  ad  valorem  system,  a  railway  runs  through  a  certain 

county,  it  touches  four  townships  in  that  county,  there  may  be  twenty  townships, 
outside  the  four,  which  are  contributing  to  the  business  of  that  road,  perhaps  even 
mote  than  the  four,  hut  for  local  purposes  those  twenty  townships  outside  would  not 
he  represented  in  the  assessment  of  that  property,  and  would  get  no  revenue  from  it. 
There   are   counties    in    this    State    which    have  not   a   foot   of   railroad,    but    they   are 

contributing  just  the  same  to  the  business  of  the  road.  Then,  if  the  road  is  assessed 
under  the  ad  valorem  system,  there  is  an  eternal  turmoil,  the  township  assessor  gets 

a  crack  at  it.  the  county  hoard  lias  to  he  right,  and  it  is  the  business  of  the  railway 
company  to  see  that  they  are  friendly.  Then  it  comes  to  the  State  hoard,  and.  of 
course,  the  railway  companies  will  t  r\  to  elect  the  man  who  will  treal  them  most 
leniently.  This  all  makes  trouble  for  the  public  and  for  the  railroads.  Now  under 
the  cross  earnings  system  we  collected  two  million  dollars  last  year  with  little 
ense  Or  trouble,  cither  to  the  Stale  or  the  railroads.      And  every  dollar  of  taxable 

property  in  this  state  is  benefited  to  thai  extent,  whether  a  county  <>r  a  township 
has  a  railroad  or  not.  the  amount  paid  into  the  treasury  relieves  all  the  properties  of 

the  state.    We  have  here  a  large  through  business,  because  of  our  i uliar  situation; 

we  have  great  lines  like  the  Bault  line  running  up  into  new  country,  the  Northern 
Pacific,  the  Northwestern,  the  Milwaukee,  running  through  the  state,  and  we  get  a 
great   amount  of  business.     The  gross  earnings  system   is  firmly   imbedded   in   our 


REPORT   OF   COMMISSION   OX   REVENUE   AND   TAXATION.  129 

State  and  in  the  minds  of  the  people,  and  until  the  people  become  convinced  that 
they  are  getting  the  worst  of  it  they  don't  wish  to  change  from  the  present  condition 
of  affairs.* 

It  should  be  noted  that  Minnesota's  method  of  defining  taxable  gross 
receipts  gives  that  State  a  larger  revenue  than  would  be  obtained  if 
the  strict  unit  rule  on  general  track  mileage  were  applied.  It  gets  the 
tax  on  all  traffic  within  the  State,  a  part  of  which,  under  the  Maine 
plan,  would  be  credited  to  outside  mileage,  and  gets  the  tax  on  its  full 
share  of  interstate  traffic. 

Vermont. 

Iii  Vermont  railroads  pa}',  at  their  option,  a  tax  of  7-10  of  1%  on 
their  property  in  the  State  appraised  by  the  unit  rule  on  a  train  mileage 
basis;  or  a  tax  of  2%%  on  their  gross  earnings,  similarly  appraised  by 
the  unit  rule.  These  taxes  are  administered  by  the  State  Tax  Commis- 
sioner.    Only  non-operative  property  is  subject  to  local  taxation. 

Most  of  the  railroads  in  Vermont  elect  to  pay  on  their  gross  earnings, 
the  State  collecting,  in  1901,  $156,133  from  that  tax  and  only  $8,766 
from  the  tax  on  appraisal  of  property. 

i 
2.  The  gross  earnings  tax  as  a  supplementary  tax. 

New  York. 

The  gross  earnings  tax  in  New  York  will  be  described  below  in  con- 
nection with  the  discussion  of  the  New  York  system  as  a  whole,  that 
system  being  too  complex  to  fit  into  any  classification  of  states  by 
leading  taxes. 

The  gross  earnings  tax  in  New  York  occupies  a  very  subordinate 
place,  it  is  levied  only  on  intra-state  earnings,  and  at  the  rate  of  five 
tenths  of  one  per  cent. 

Ohio. 

Ohio  supplements  the  old-fashioned  general  property  tax  on  railroads 
by  an  "excise  tax"  on  gross  earnings.  The  property  tax  is  assessed  on 
each  railroad  by  a  board  composed  of  the  auditors  of  the  counties 
through  which  the  road  runs. 

In  1896  the  State  levied  one  half  of  one  per  cent  on  gross  earnings 
within  the  State,  including  that  proportion  of  interstate  earnings  which 
the  mileage  in  the  State  bore  to  the  whole  mileage. 

In   1904  the  rate  was  made   1%.     This  excise   tax  covers  all  other 

public-service  corporations  as  well  as  railroads.     The  law  defines  gross 

earnings  in  the  following  terms: 

In  ascertaining  the  gross  earnings  from  its  operation  within  Ohio  of  a  railroad  coru- 
pany  whose  line  lies  partly  within  and  partly  without  this  State,  the  gross  earnings 

♦Report  of  Ontario  Commission  on  Railway  Taxation,  l'.iori,  pp.  103-104. 
9        KT 


1  ."JO  REPORT   OF   COMMISSION   OX    RKVKMK    AND    TAXATION. 

from  its  operation  of  the  entire  line  or  system,  shall  be  divided  by  the  total  Dumber  of 
miles  operated  to  obtain  tin-  average  frross  earnings  per  mile,  ami  the  gross  earnings 
from  tin-  operation  within  this  State  shall  l>e  taken  to  he  the  average  gross  earnings  per 
mile  multiplied  by  the  number  of  miles  operated  within  this  State.* 

Pennsylvania. 

The  gross  receipts  tax  in  Pennsylvania  covers  many  other  classes  of 
public-service  corporations  besides  railroads.  It  is  levied  on  the  gross 
receipts  within  the  8tate  only.  It  is  strictly  a  supplementary  tax 
added  to  the  tax  on  the  capital  stock  described  above.  The  rate  is  8 
mills  on  the  dollar.  The  revenue  from  this  source  is  not  large,  but 
grows  steadily;  in  1896  it  was  $699,823,  and  in  1904  $758,240. 

3.  The  repeal  of  the  gross  earnings  tax  in  Michigan  and  Wisconsin. 

In  view  of  the  great  satisfaction  with  which  the  gross  earnings  tax 
seems  to  be  regarded  in  Maine  and  Minnesota,  where  it  has  been  used 
for  so  many  years,  and  of  the  theoretical  and  practical  advantages  of 
the  tax.  its  abandonment  by  two  states  after  years  of  experience  with 
it  requires  special  consideration.  In  both  Michigan  and  Wisconsin  the 
tax  was  abandoned  after  several  heated  campaigns  which  made  and 
unmade  the  political  fortunes  of  different  leaders.  Unfortunately,  in 
both  instances,  the  real  reasons  for  the  change  has  been  more  or  less 
obscured  by  the  heat  of  those  hard-fought  political  campaigns,  so  that 
it  is  impossible  to  secure  in  print  any  statement  of  the  situation  that 
does  not  seem  to  the  impartial  observer  tainted  with  prejudice.  This 
Commission  has  corresponded  with  persons  in  both  states  who  might  be 
considered  impartial  observers  of  the  events,  and  has  in  every  instance 
been  told  "our  opinion  is  that  this  or  that  is  the  true  reason,  but  un- 
fortunately we  are  in  such  a  position  that  we  much  prefer  you  should 
nut  quote  us."  The  following  statement,  therefore,  involves  only  those 
facts  taken  from  printed  records  which  seem  to  be  fully  established 
and  does  not  include  any  attempt  to  summarize  the  opinions,  feelings 
and  prejudices  which  seem  to  have  had  much  to  do  with  the  changes. 
In  both  states  the  watchword  of  the  movement  was  "equal  taxation," 
which  seems  to  mean  the  taxation  of  railroads  in  the  Bame  manner  and 
at  the  same  rate  as  other  property.  The  phrase  as  used  seems  to  imply 
that  "property"  is  necessarily  homogeneous,  and  that  a  railroad  can 
be  justly  taxed  in  the  Bame  manner  as  a  farm.  Whether  any  true 
"equality"  of  taxation  can  he  reached  by  a  merely  mechanical  appli- 
cation of  similar  methods  to  classes  of  property  dissimilar  in  character, 
i-  more  than  doubtful.  In  both  states  the  law  and  the  courts  recognize 
BUfficient  difference  between  railroad  property  and  other  property  to 
justify  "classification'"  in  methods  of  asseSBmenl  (valuation)  and  rate 
making. 

■  K.  vised  Statutes  of  Ohio,  Sec.  2780-19. 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  131 

Michigan. 

The  Constitution  of  Michigan  adopted  in  1850  permitted  the  Legis- 
lature to  levy  "  specific  taxes,"  as  they  were  called,  on  certain  classes  of 
corporations,  for  certain  State  purposes,  mainly  educational.  The  gross 
earnings  tax  on  railroads  rested  on  this  provision.  The  tax  was  changed 
from  time  to  time,  particularly  as  to  rates.  The  rates  as  fixed  in  1897 — 
the  last  time  the  tax  was  amended — were: 

On  gross  earnings  not  exceeding  $2,000  per  mile,  2J%. 
On  gross  earnings  over  $2,000  and  not  exceeding  $4,000  per  mile,  3J%. 
On  gross  earnings  over  $4,000  and  not  exceeding  $6,000  per  mile,  4  %. 
On  gross  earnings  over  $6,000  and  not  exceeding  $8,000  per  mile,  4£%. 
On  gross  earnings  over  $8,000  per  mile,  5%. 

The  base  was  all  income  from  business  wholly  within  the  State  plus 
"such  pro  rata  proportion  of  the  interstate  business  as  the  length  of 
road  in  Michigan  bears  to  the  entire  length  of  road  over  which  inter- 
state business  is  done."  The  taxes  so  paid  were  in  lieu  of  all  other 
taxes  except  those  on  non-operative  property. 

In  1899  the  Michigan  gross  earnings  tax  was  yielding  $1,240,000  on 
a  mileage  of  7,082  miles  of  main  track  and  3,809  of  siding.  This  is 
approximately  $175  per  mile  of  main  line.  For  comparison,  Cali- 
fornia roads  are  paying  in  State  and  local  taxes  about  $254  per 
mile.  The  low  returns  are  accounted  for  in  part  by  the  fact  that  the 
mileage  in  the  northern  part  of  the  State  was  not  yielding  high  gross 
earnings  per  mile  of  line. 

From  the  difficulty  afterwards  experienced  in  ascertaining  the  "true 
cash  value"  of  railroads  in  Michigan  it  is  obvious  that  nobody  in  the 
State  could  have  had,  at  the  time  of  the  agitation  for  the  establishment 
of  "equal  taxation,"  any  accurate  knowledge  as  to  whether  the 
"specific"  (gross  earnings)  tax  on  railroads  was  too  high  or  too  low. 
Indeed,  it  proved  a  difficult  task  to  arrive  at  a  valuation  which  made 
the  ad  valorem  tax  exceed  the  "specific"  tax. 

Michigan  undertook  to  abandon  the  gross  earnings  tax  by  legislative 
enactment  in  1898.  But  it  was  found  that  such  a  step  required  a  con- 
stitutional amendment. 

In  1899  the  newly  created  Stale  Tax  Commission  was  required: 

To  inquire  into  and  ascertain  the  valuation  of  the  properties  of  corporations 
paying  specific  taxes  under  any  laws  of  this  State  and  to  ascertain  the  actual  rate 
of  taxation,  as  based  upon  the  valuation  of  said  properly  that  is  being  paid  by  said 
corporations  and  to  this  end,  said  Board  shall  require  reports  from  and  make  inves- 
tigations as  to  the  properties  of  such  corporations  in  the  same  manner  and  to  the 
same  extent   pa  if  said  corpora t  ion   were  paying  taxes  under  this  act. 

To  further  report  to  the  Legislature  at  the  beginning  of  the  regular  sessions 
specifically  the  true  valuation  of  the  properties  of  the  State  and  the  rate  of  taxation 
the  same  are  paying,  to  the  end  that  the  Legislature  shall  have  the  information 
necessary  to  rearrange  the  rate  or  system  of  taxation  on  said  properties,  so  that  all 
taxable  properties  of  this  State  may  he  taxed  uniformly. 


L32  REPORT   OP   COMMISSION   ON    REVEN1  E   AND   TAXATION. 

Among  the  corporations  paying  specific  taxes  were  the  railroads. 
The  president  of  thai  tax  commission  has  this  to  s.-iy  of  the  work  of 
his  commission  in  compliance  with  the  law: 

The  magnitude  and  Importance  of  this  work  become  a1  once  apparent.     I  or  years, 

upon  one  band,  the  i pie  have  been  charging  thai   railroads  were  nol   contributing 

their  jusl  Bhare  of  taxation ;  thai  while  other  property  in  the  State  was  paying  upon 
an  average  more  than  two  per  cenl  upon  assessed  value,  thai  railroads  were  escaping 
with  but  a  small  fraction  of  such  rate,  should  the  amounts  paid  by  them  be  reduced 
t<>  an  ad  valorem  basis. 

The  law  for  many  years  lias  provided  thai  railroad  companies  Bhould  report  on 
or  before  April  firsl  of  each  year,  under  oath,  t<>  the  Commissioner  of  Railroads: 

1.  The  estimated  value  of  the  railroad  bed,  including  iron  and  bridges. 

i'.  The  estimated  value  of  rolling  stock. 

I'..  The  estimated   value  of  stations,   buildings  and   fixtures. 

4.  The  estimated   value  of  other  property. 

(See  Section  ."•'J  1  2  Miller's  Annotated  Statutes.) 

Owing  to  alleged  inability  on  the  part  of  companies  to  give  this  specific  informa- 
tion, they  have  been  perm  i  tod  to  state  the  cost  of  these  elements  instead,  and  such 
COSt,   80   reported   for   ten   years   last    past,    has  averaged  approximately   $290,000,000. 

In  the  absence  of  known  present  valuations  (because  not  reported  by  the  com- 
panies themselves),  it  has  been  roughly  assumed  that  these  costs,  so  reported,  should 
be  taken   as   the  approximate  value  and   that    to  apply   the  average  rate  paid  by  other 

properties  would  demand  from  the  railroads  of  Michigan  higher  taxation,  either  by 
an  increased  specific  rate  or  by  placing  them  upon  an  ad  valorem  basis,  as  permitted 
by    a    recent    constitutional   amendment. 

I  pon  the  part  of  the  railroad  companies  it  has  been  claimed  that  it  was  quite 
impossible  to  estimate  the  values  of  their  tangible  properties,  as  required  by  law. 
That  no  inventories  were  made  by  them  from  which  such  estimates  could  be  made 
and  thai  cost  was  the  nearest  approach  to  the  statutory  requirement  in  their 
possession. 

It  has  been  further  maintained  by  the  companies  that  they  were  alreadj  paying 
their  just  share  of  taxation  and  that  the  system  of  specific  taxation  was  better 
adapted  to  their  kind  of  business  than  taxation  upon  an  ad  valorem  basis. 

For  at    least   twenty  years  these  biennial   legislative  controversies  have  taken   place, 

and  to  satisfy  public  sentiment,  and  that  the  Legislature  mighl  have  solid  ground 
upon  which  to  legislate,  the  foregoing  duties  were  imposed  upon  the  Tax  Commission. 

THE   PBOBLKM    FOB   THE    TAX    COMMISSI!  I  \  . 

The  first  question  that  confronted  the  commission  was  a  proper  method  of 
procedure.  Correspondence  was  commenced,  very  soon  after  the  commission  had 
been  appointed,  with  other  states.  Letters  were  written  to  every  other  state,  asking 
for  laws,  constitutional  provisions,  reports  of  commissions,  blanks  upon  which 
reports  were  made  by  rail-companies,  etc.  Replies  were  received  from  nearly  till 
the  stales  ami  immense  quantities  of  data  obtained.  1'ersonal  correspondence  was 
further  conducted  with  stales,  where  taxation  of  railroads  was  upon  values.  Their 
specific  methods  were  inquired  into,  the  manner  ill  which  valuations  were  made  and 
the  thoroughness  with  which  it  was  done.  It  may  be  said  thai  after  a  careful  study 
and    examination    of    the    plans    and    methods    pursued    in    all    these    states,    and    the 

results  accomplished,  no  one  of  them  see I  to  offer  a  fair  or  satisfactory  solution 

of  the  problem  before  this  commission. 

In  not  a  single  instance  did  the  methods  followed  and  pursued  seem  to  be  at  all 
points  t'a'n-  and  defensible.     Among  the  methods  pursued  in  other  stales  and  suggested 

for  this  commission  to  follow   were  the  following: 

1.    To   levy   a    tax    upon    the    par    value   of   BtOCk.       It    will    be    readily   seen    that    such 

method   could   not    b< osidered.      Thai    variation    in   stock    values    range    from   .'!  j    to 

150  and  that  lo  levy  am  lax  upon  par  value  would  be  without  precedent  and 
unfair   as    values   go. 


REPORT   OP    COMMISSION    OX    REVENUE    AND    TAXATION.  L33 

2.  To  assess  upon  the  actual  value  of  stock,  as  shown  upon  the  markel  or  in 
other  words  to  estimate  the  value  of  the  road  by  the  markel  value  of  its  stock  alone. 

Such  method  would  not  take  into  consideration  bonded  indebtedness.  To  illus- 
trate: The  road  may  have  stock  worth  on  the  market  fifty  cents  on  the  dollar.  The 
total  stock  is  worth  $5,000,000.  At  the  same  time  the  road  may  be  bonded  for 
$5,000,000  and  the  bonds  perfectly  good.  It  is  patent  that  the  stock  is  subject  to 
the  bonded  indebtedness  and  that,  measured  by  the  market  value,  the  road  is  worth 
$10,000,000;  the  stockholders  having  an  interest  of  $5,000,000  in  the  road,  and  the 
bondholders  another  S."»,000.000.  Such  plan,  therefore,  as  would  tax  only  the  stock 
interest  in  the  road,  would  in  few  cases  approach  actual  value,  and  would  neither 
be  just  nor  practicable. 

3.  To  value  railroads  upon  the  market  quotation  of  both  stock  and  bonds. 

The  Supreme  Court  of  the  United  States  has  indicated  that  such  method  would 
probably  be  as  fair  as  any  in  arriving  at  the  value  of  similar  corporations.  It  was 
found,  however,  upon  investigation,  that  the  stock  and  bonds  of  but  nine  Michigan 
railroads  were  upon  the  market:  that  the  stock  and  bonds  of  all  the  others  were 
unknown  to  the  open  market,  and  that  such  a  method  of  valuation  could  not  be 
applied,  except  in  the  few  cases.  This  method  was  therefore  found  to  be  impracticable 
also. 

4.  Gross  or  net  earnings. 

A  tax  upon  gross  earnings  is  the  present  method  in  this  State,  and  is  a  sufficient 
basis  upon  which  to  estimate  a  specific  tax.  but  is  only  one  of  the  elements  from 
which  valuation  can  be  ascertained.  The  "net  earnings"  theory  is  one  strongly 
advocated  by  many  as  the  only  rational  method  of  taxation. 

Theoretically  the  proposition  may  be  true,  but  the  State  and  the  practical  assessor 
is  at  once  confronted  by  the  imposing  and  forceful  questions  : 

How   will  the  State  know  that  reports  of  net  earnings  are  always  correct? 

How  can  the  State  protect  itself  against  the  loading  of  expense  accounts  for  the 
purpose   of  escaping   taxation? 

If  the  State  adopt  such  method  for  railroads,  should  it  not  adopt  a  like  course 
with   every  other  corporation  and  for  other  taxable  properties? 

If  a  company  show  by  its  report  no  net  earning  in  any  year,  though  it  may  have 
millions  of  dollars  in  physical  properties,  would  it  not  escape  taxation  entirely? 

Considering  these  questions  practically  it  was  believed  that  to  make  a  valuation 
of  railroads  upon  net  earnings  alone  would  not  be  consonant  with  our  tax  system 
and  would  extend  to  railroads  a  "self-assessment"  power  not  granted  to  other  cor- 
porations or  persons.  It  was.  therefore,  deemed  wise  that  a  thorough  appraisement 
be  made  of  the  physical,  tangible  properties  of  all  railroads  of  the  State.  The  task 
was  not  only  herculean  in  magnitude,  but  most  difficult  of  execution.  It  required 
expert  ability  not  possessed  by  the  commission.  That  such  work,  if  performed  at 
all,  should  be  so  well  and  thoroughly  done  as  to  command  the  respect  of  the  State 
and  of  the  railroads  as  well:  otherwise  it  would  be  valueless  and  prove  a  waste  of 
time   and    money. 

The  matter  was  placed  before  the  Board  of  State  Auditors  and  their  assent 
obtained  to  an  allowance  of  reasonable  bills  for  the  work.  Professor  M.  E.  Cooley, 
of  the  Michigan  University,  a  civil  engineer  of  national  repute  and  wide  experience, 
was  employed  by  the  commission  to  superintend  and  plan  the  appraisal.  He  was 
not  hampered  by  limitations  or  directions,  except  that  all  bills  must  be  approved  by 
hims.lf,  the  commission,  and  the  P.oard  of  State  Auditors.  He  was  authorized  to 
employ  Buch  help  as  he  required.  The  work  was  to  be  done  by  men  who  were  compe- 
tent and  fair,  without  any  reference  to  their  place  of  residence  or  their  politics. 
They  must  have  fitness  for  their  work  and  he  alone  was  to  be  the  judge  of  such 
t':tne>s  and  ability. 

It  was  soon  apparent  that  the  cost  of  this  work  would  he  in  excess  of  first 
estimates,  hut  it  was  believed  that  what  the  people  wanted  was  some  solid  basis 
upon  which  to  found  a  system  of  railroad  taxation  and  that  a  cost  of  forty  or  fifty 
thousand  dollars,  if  need  be,  would  be  economy  in  the  end.  Upon  such  vast  properties 
the  taxation  upon  two  or  three  millions  of  dollars  would  in  a  single  year,  at  the 
average  rate  of  taxation,  equal  the  total  cost  of  appraisal. 


134  BEPORT  OF  COMMISSION    <>X    REVENUE   AND   TAXATION. 

It  was  further  assumed  that  a  systematic  <-« »ni i >l«*i «>  and  fair  valuation  of  the 
railroad  properties  of  Michigan,  at  this  time,  if  put  into  proper  Bhape  for  reference, 
would  obviate  1 1  •  •  -  necessitj  for  another  complete  valuation  for  many  years;  that 
additions  or  deductions  could  be  made  as  necessity  required,  but  that  undoubtedly, 
for  a  period  of  at  least  ten  years,  a  re-valuation  by  the  methods  employed  for  the 
present  one  would  bo  unnecessary. 

I  \  I  \  M.ll-.l  .1      \  ALUES. 

It  is  w .11  known  that  with  many  roads  an  intangible  value  exists  beyond  that 
found  in  the  physical  properties.  It  is  generally  understood  that  under  the  present 
system  of  taxing  gross  earnings  the  taxes  paid  per  mile  of  road  vary  to  a  much 
greater  extent  than  do  the  tangible  properties  of  the  roads.  In  other  words,  one 
r.. ad  may  have  a  tangible  property  worth  $15,000  per  mile,  while  another  road  has 
a  tangible  property  worth  $25,000  per  mile.  The  road  having  the  tangible  property 
worth  SU.'.OOO  per  mile  may  be  paying  upon  gross  earnings  to-day  four  dollars  of 
tax  per  mile  to  one  dollar  per  mile  paid  bj  the  road  having  the  property  of  lesser 
value.  Tangible  properties  and  earnings  do  not  correspond  proportionately,  and  it 
is  evident  that  the  franchise  and  intangible  values  cannot  be  estimated  by  a  pro- 
portionate addition  to  the  physical  or  tangible  values. 

It  was.  therefore,  deemed  wise  by  the  commission  that  investigation  along  this 
line  should  be  made  and  reported  to  the  Legislature.  Xo  one  familiar  with  the 
Subject,  nor  better  fitted  by  education  and  experience  to  cope  with  it.  could 
be  suggested  than  Professor  Henry  «'.  Adams,  professor  of  political  economy  at  the 
Michigan  University.  He  has  been  for  many  years  statistician  of  the  Interstate 
Commerce  Commission  and  has  had  wide  experience  along  many  lines  especially  pre- 
paring him  for  such  work.  He  was  employed  to  take  charge  of  this  branch  of  the 
appraisal,  and  submits  his  report  herewith. 

It  has  been  urged  that  since  Michigan  has  no  law  especially  taxing  franchises, 
such  appraisement  oughl  not  to  be  considered  at  this  time,  but  it  is  assumed  by  the 
commission,  since  these  franchise  elements  are  so  apparent  and  real  and  in  many 
cases  so  valuable,  that,  in  harmony  with  the  laws  of  many  other  states,  in  accord 
with  justice,  and  by  the  sanction  ami  indorsement  of  State  and  Federal  courts,  the 
Legislature  of  Michigan  ought  to  and  probably  will  enact  laws  by  which  franchises 
may  be  reached  by  taxation.  That  not  only  railroads  should  be  taxed  upon  their 
franchise  values,  but  other  corporations  as  well. 

It"  the  Legislature  should  elect  to  pass  a  law  of  this  character  it  should  have 
before  it  some  positive  information  hearing  upon  the  subject.  The  methods  that 
have   been    employed   and    the    results    obtained   are   shown    by    reference    to    Professor 

Adams's  report.  Should  the  Legislature  enact  a  law  for  the  taxation  of  railroads 
upon  an  ad  valorem  basis,  it  will  have  a  complete  valuation  of  all  physical  prop- 
erties, and  to  complement  ill"  same  an  appraisement  of  franchise  values,  in  addition 
to  the  physical,  as  found  by  Professor  \dams.  it  will  have  also  an  independent 
valuation  of  all  railroads  of  the  State  whose  slocks  and  bonds  are  found  upon  the 
marker. 

Should  the  Legislature  SO  elect,  it  can  pass  a  law  for  the  taxation  of  railroads 
under  the  constitutional  amendment  upon  valuations.  To  the  physical  valuation  in 
some  cases  may  be  added  the  franchise  or  intangible  values.  If  such  roads  have  no 
intangible    Values,    then    only    the   physical    values    would    or    need    be    taxed. 

I  '•  such  method  the  properly  of  no  company  need  be  assessed  beyond  its  whole 
value,  though  such  value  be  divided  into  two  parts,  the  tangible  and  the  intangible, 
or  the  physical  ami  franchise  elements. 

Following    the    abstracts    of    laws    of    other    states    relative    to    the    assessment    of 

intangible  property  will  he  found  the  report  of  Willard  10.  Warner,  who  was 
employed  by  the  commission  to  ascertain  the  valuation  of  the  railroads  of  the  State 

upon   what    is  known  as  the  storks  and  bonds  basis. 

As   he   has  preceded   his   tables   with   an   explanation   of   the  basis  upon   which   they 

were  computed,  I  i>e^r  leave  to  submit  the  same  without  further  explanation. 


REPORT   OF   COMMISSION   ON   REVENUE    AND   TAXATION.  135 

In  1900  the  Constitution  of  the  State  was  amended  so  as  to  permit 
of  ad  valorem  taxation  on  railroad  property.  Before  the  new  provisions 
of  the  Constitution  were  put  into  effect  the  valuation  of  the  railroads 
of  Michigan,  referred  to  in  the  statement  of  the  commissioner  abov* 
quoted,  was  carried  through  in  full,  at  great  expense  to  the  State.  It 
is  reported  to  have  cost  $57,000,  to  which  is  to  be  added  $75,000  more 
for  the  expenses  of  the  Tax  Commission,  or  a  total  of  $132,000. 

The  following  citation  from  the  Second  Report  of  the  State  Tax 
Commission  shows  how  difficult  the  task  was  and  with  what  care  it  was 
accomplished: 

In  August.  1900.  Mortimer  E.  Cooley,  Professor  of  Mechanical  Engineering  at 
the  University  of  Michigan,  was  employed  by  this  board  to  appraise  the  physical 
property  of  railroad,  telegraph,  telephone,  plank  road,  and  river  improvement  com- 
panies, and  the  results  of  this  work  were  shown  in  the  last  annual  report  of  the 
commission.  At  the  same  time  Henry  C.  Adams,  professor  of  political  science  at  the 
University  of  Michigan,  undertook  the  examination  of  the  financial  operations  of 
the  railroad  companies  of  Michigan,  and  the  results  of  his  work,  with  those  of 
Professor  Cooley,  were  finally  completed  in  May,  1901,  and  compiled.  This  com- 
pilation is  now  known  as  the  Michigan  Railroad  Appraisal.  Ex-Commissioners  Robert 
Oakman  and  Milo  D.  Campbell  also  made  respective  examinations  along  the  line  of 
net  earnings  and  the  market  value  of  railroad  securities.  Commissioner  Freeman. 
of  the  present  board,  however,  held  the  opinion,  as  above  stated,  that  no  one  plan 
of  valuation  should  be  rigidly  applied,  but  that  all  plans  should  be  considered  in 
arriving  at  value. 

Too  much  importance  can  not  be  attached  to  the  laborious  task  undertaken  and 
successfully  accomplished  by  Professor  Cooley  and  his  corps  of  assistants  in  the 
appraisal  of  the  physical  property  of  the  railroad  companies.  It  was  a  marvelous 
task  undertaken  and  accomplished.  Against  his  figures  showing  the  cost  and  present 
value  of  the  physical  property  of  a  railroad  may  be  shown  the  cost  of  the  property 
as  given  in  the  balance  sheet  of  the  railroad  company,  and  the  difference  will  approxi- 
mately illustrate  the  accumulation  carried  on  the  books  of  the  company.  He  found 
the  total  cost  of  reproduction  of  all  the  railroads  of  the  State  to  be  about 
Siiiii'.OOO.OOO,  and  for  the  same  year  the  reports  of  the  companies  to  the  Railroad 
Commissioner  showed  a  grand  total  cost  of  nearly  $:J00,000,000.  This  large  differ- 
ence would  be  misleading  were  it  not  known  to  be  due  to  different  forms  of  book- 
keeping  and  the  repeated  charging  up  of  the  cost  of  new  items  without  the  removal 
of  the  cost  of  those  replaced. 

It  is  important  to  know  from  the  physical  standpoint  what  it  will  cost  to 
reproduce  a  given  property,  and  this  figure  could  but  rarely  be  found  in  the  books 
of  any  railroad  company  that  has  operated  for  a  period  of  years.  It  is  not  presumed 
that  the  cost  and  present  value  of  the  physical  property  in  any  given  case  are  exact, 
hut  they  sum  up  what  may  be  called  the  first  fundamental  element  of  value  and 
establish  a  definite  starting  point  from  which  to  work.  A  railroad  property  may  be 
worth  more  or  less  than  its  physical  value,  but  how  much  more  or  how  much  less 
will  he  largely  dependent  upon  the  amount  invested  taken  in  connection  with  the 
earning  power  and  other  governing  principles. 

The  .Michigan  Railroad  Appraisal,  conducted  by  Professor  M.  E.  Cooley  and  a 
corps  of  some  sevent y-fiv.  engineers,  occupied  the  period  from  about  the  1st  of 
September,  L900,  t<>  the  30th  of  May.  1901,  not  all  of  the  force  being  engaged  upon 
the  work,  however,  during  the  entire  period.  The  plan  that  he  evolved  for  the 
accomplishment  of  his  purpose  was  tirst  a  division  of  the  forces  into  two  parts, 
namely,    Meld    men    and    office    men.      The    latter    were    sent    to    the    various    railroad 


136  REPORT   OF   COMMISSION    ON    REVEN1  EC    \NI>   taxation. 

offices  in  small  groups  and  there  gathered  all  date  thai  was  available  regarding  the 
property  of  each  company. 

Michigan  Railroad  Appraisal. 

Mileage.  Miles. 

\i     o    line    " 7,082.35 

Branches    730.92 

Spurs  and  Bidings 2.904.70 

-      nil  i rack  16  1-83 

Cost  of  Preseni 

Subject.                                                                Reproduction.  Value 

1.   Engineering,   l\   items  -  to  25  inc.  and  •"•"> *     5,386,772  $     5,386,772 

•_'.   Right-of-way  ami  Btation  grounds 27,745,313  27.7  15,313 

::.   Ural   .'siatc    863,337  863,337 

4.  Grading   21,699,995  21,693,024 

5.  Tunnels    1,148,070  1,093,445 

6.  Bridges,  trestles,  and  culverts 8,027,119  8,337,819 

7.  Ties  (cross  and  switch  ties) 11,139,924  6,148,748 

s.  Kails     28,703,012  21,865,994 

9.  Track    fastenings    3,845.030  2,987,982 

in.   Frogs,  switches,  and  crossings 1,469,781  1,040,120 

11.  Ballasl     3,723,558  3,723,558 

12.  Track  laying  and  surfacing 6,555,638  6,400,972 

13.  Fencing    2,763,595  1 ,627,790 

11.  Crossings,   cattle-guards,   and   signs 607.-"  TJ  12N.474 

15.  Interlocking  and  signal  apparatus 501,883  448,686 

16.  Telegraph    <3<M    telephones 2r>S.!IN.->  134,797 

17.  Station  buildings  and  fixtures 4,108,736  3,111,103 

18.  Shops,  roundhouses,  and  turntables 2,157,228  1,467,569 

19.  Shop    machinery    and    tools 1,107,910  882,634 

20.  Water  stations    7_,-"..<-.7<)  522,135 

21.  Fuel    stations    303,289  201,461 

22.  Grain    elevators    1,336,794  1,009,043 

23.  Warehouses    258,646  183,910 

24.  Docks  and   wharves 5,531.919  3,831,934 

25.  MiscellaJ us   structures 1,234,345  856,253 

2<;.  Locomotives    9,021,517  5,092,053 

27.  Passenger    equipment    3,197,473  2,277,271 

28   Freighl   equipment    19,734,246  13,690,587 

29.   Miscellaneous    equipment    702,940  123,689 

81.  Ferries    and    steamships 1,725,000  1,095,500 

32.  Electric  plants    93,061  sn.sns 

.".::.  Terminals  (items  Included  above) 

34.  Legal  expenses,  0.5$   items  2  to  25  inc.  and  33.  .          673,34%  673,349 

35.  [nterest,  3$   items  1  to  34  inc 5,290,549  5,290,549 

36.  Miscellaneous  expenses — 

Organization,    1.5$    2,645,277  2,645,277 

Contingencies,    10$    18,428,759  15,127,110 


Total  cost  of  construction  and  equipment.  .$202,716,262  (166398,156 

87.  Stores  and  supplies 1,474,829  1,474,829 

They  Bearched  the  en;:ineerin::  records  and  gathered  a  full  description  and  classi- 
fication of  mileage,  track,  roadbed,  rolling  stock,  buildings,  and  lands,  entering  a 
complete  record  in  detail  upon  special  blank  forms  prepared  for  the  purpose.     Early 


REPORT   OF    COMMISSION'    ON   REVENUE    AND    TAXATION.  I'll 

in  the  work  the  i<l«-:i  of  following  the  classification  of  construction  expenses  as  out- 
lined  by  the  Interstate  Commerce  Commission  was  conceived,  and  this  classification, 
with  hut  slight  alteration,  was  used  as  a  guide  in  making  up  these  blank  forms. 
The  list  as  used  comprised  the  items  in  the  following  table:  and  as  here  given, 
shows  the  grand  total  cost  of  reproduction  and  present  value  of  all  physical  rail- 
road  property   in   Michigan. 

The  field  men  or  inspectors  before  referred  to  were  supplied  with  a  concise  copy 
of  the  information  gathered  by  the  office  men  and  sent  out  singly  on  actual  inspec- 
tion of  the  physical  property  of  each  railroad.  The  inspector  also  carried  with  him 
an  ordinary  engineer's  notebook  upon  which  to  make  his  own  independent  notes 
regarding  the  description  and  condition  of  the  property  and  at  the  same  time  check 
up  the  list  supplied  him  by  the  office  force.  He  covered  his  road  either  on  foot  or 
by  means  of  a  hand  car,  but  was  not  permitted  to  make  his  examination  from  the 
cab  of  a  locomotive  or  the  rear  of  a  passenger  or  freight  train.  He  described 
minutely  the  physical  property,  such  as  bridges,  ties,  rails,  spik.'s.  rolling  stock. 
roadbed,  station  buildings,  etc.,  but  did  not  place  any  value  in  dollars  and  cents 
upon  the  various  items  in  the  field.  His  sole  duty  was  to  describe  each  item  and 
ascertain,  if  possible,  the  time  it  had  been  in  use  or  what  percentage  its  physical 
condition  represented  of  a  new  item  of  the  same  kind,  the  valuation  being  made  at 
a  later  period. 

The  whole  work  was  necessarily  a  progressive  one  and  no  precedent  for  its 
accomplishment  existed.  So  it  was  found  necessary  to  withdraw  some  of  the  office 
men  and  field  men  from  their  first  duties  as  operations  advanced  and  consolidate 
them  into  a  calculating  or  estimating  body  at  the  main  office  in  Detroit.  These  men 
received  the  notebooks  of  the  field  inspectors  as  fast  as  each  road  was  gone  over, 
together  with  the  office  blanks  first  mentioned,  and  from  the  two  records  com- 
menced  the  task  of  estimating  the  cost  and  present  value  of  the  property  examined. 
To  avoid  errors  or  influence  in  the  nature  of  "the  personal  equation"  of  each 
individual,  a  set  of  tables  containing  average  costs  of  all  forms  of  railroad  property 
down  to  the  minutest  detail,  were  made  out.  These  price  tables  were  the  result  of 
averages  carefully  arrived  at  and  discussed  by  conference  of  the  ablest  men  engaged 
on  the  work.  For  illustration,  the  price  of  steel  rails  as  given  in  these  tables 
was  Si's  per  gross  ton,  being  found  by  averaging  the  standard  weekly  quotations 
for  a  period  of  one  year.  Some  fifty  of  these  tables  were  completed,  and  the  calcu- 
lating force  adhered  rigidly  to  them  in  estimating  the  cost  of  property.  The  present 
value  was  then  found  by  multiplying  the  cost  by  the  percentage  of  condition  estab- 
lished by  the  field  inspector. 

Another  feature  that  now  presented  itself  was  the  necessity  of  honest  expert 
criticism  of  the  methods  being  used  in  order  that  no  false  premises  should  creep 
into  the  process  of  valuation.  With  this  idea  in  view  a  board  of  review  was 
appointed,  consisting  of  Messrs.  Octave  Chanute  and  Maj.  G.  W.  Vaughn  of 
Chicago,  Mr.  Charles  Hansel  of  New  York,  and  Prof.  Charles  E.  Creene  of  Ann 
Arbor,  four  of  the  best  known  engineers  in  the  United  States.  All  of  these 
gentlemen  are  members  of  the  American  Society  of  Civil  Engineers,  Mr  Chanute 
being  a  past  president  of  the  society.  This  board,  after  a  careful  examination  of 
all  that  had  been  done,  made  many  needful  suggestions.  Special  departments  weir 
Organized  at  this  time  in  both  field  and  office.  These  departments  shaped  themselves 
naturally  along  the  lines  of  civil,  mechanical,  electrical  and  marine  engineering  in 
the  field,  and  each  had  a  counterpart  in  the  office,  such  as  "Department  of  Roadway. 
Bridges  and  Buildings,  Department  of  Motive  Power.  Rolling  Stock  and  Tools. 
Department  of  Telegraph,  Telephones  and  Electric  Stations,  and  Department  of 
Docks,    Wharves    and    Car    Ferry    Terminals." 

Toward  the  close  of  December,  1900,  the  field  work  and  inspection  was  practically 
completed  and  the  field  men  either  discharged,  or  retained  for  service  in  the  calcu- 
lating force  as  exigencies  required.  Preliminary  results  were  reached  in  the  office 
and   it   became  necessary  to  compile  them  in  a  systematic  manner. 

A   portion   of   the   force  now   employed   was  organized   into  a  "Checking   Depart- 


138  REPORT  OF   COMMISSION'   ON  REVENUE    AND   TAXATION. 

in. -hi"  and  began  a  systematic  study  of  the  results  passing  through  the  compiling 
department  for  the  purpose  of  correcting  errors.  Prom  the  Isl  of  January  to  the 
1st  of  March  the  work  was  confined  almost  wholly  to  the  office,  the  field  work 
having  bees  completed  and  final  results  on  many  of  the  roads  were  reached.  About 
Hi.'  Lsl  of  March  it  was  decided  i"  complete  the  work  in  Lansing,  and  to  this  end 
:ill  records  were  shipped  to  the  office  of  the  Tax  Commission,  and  the  number  of 
men   employed  diminished   to   four. 

For  the  next  two  months,  or  until  the  end  of  April,  the  time  was  spent  in  type- 
writing results  and  arranging  them  in  an  orderly  condition  for  binding  and  preserva- 
tion. The  typewritten  work  was  done  on  large  sheets,  four  copies  at  a  time.  When 
completed,  the  finished  work  was  tlms  reproduced  in  quadruple  and  formed  nine 
complete  volumes  on  "1-1  by  IT  inch  paper,  with  from  KJO  to  200  pages  in  each 
volume.  The  office  notes  and  Other  data  gathered  from  the  railroad  companies  was 
bound  into  twelve  large  !)  by  IT  inch  volumes.  The  inspectors'  notes  were  of  course 
preserved  in  the  engineers'  Held  books,  and  the  remaining  data  gathered  into  more 
or  less  compact  shape  between  hard  board  covers. 

In  addition  to  this,  twelve  volumes  of  letters  and  correspondence  remained. 
together  with  five  volumes  comprising  the  appraisal  of  telegraph  and  telephone 
properties.  Considerable  time  was  spent  in  indexing  and  filing  this  small  library, 
and  -nine  little  linal  proofreading  was  also  attempted.  The  entire  set  of  results 
n.iw  exists  in  the  office  of  the  Tax  Commission,  and  has  formed  one  of  the  most 
importanl  parte  of  the  basis  of  valuation  of  railroad  property  used  by  the  board. 

No  attempt  has  been  made  here  to  describe  in  more  than  a  superficial  manner 
the  progress  of  the  .Michigan  Railroad  Appraisal  and  the  many  difficulties  encoun- 
tered in  bringing  it  to  a  successful  completion.  It  is  not  too  much  to  say,  however, 
thai  this  undertaking,  both  in  its  magnitude  and  importance  of  results,  is  unique 
in   the   history   of  the   United   States. 

The   investigations   pursued  by   Professor  Adams,  as  before  stated,  covered  the 

ec mic  side  of  the  question  of  railroad  valuation,  and  were  designed  to  supplement 

the  physical  value  found  by  Professor  Cooley.  The  results  of  his  work  have  also 
been  collected  in  book  form  and  filed  in  the  office  of  the  board.  In  order  to  be 
thoroughly  conservative  and  beyond  criticism,  he  took  the  gross  earnings  of  the 
various  companies  and  averaged  them  for  periods  ranging  from  four  to  ten  years. 
The  same  average  was  taken  in  the  case  of  operating  expenses,  and  the  difference 
between  the  two  produced  the  average  earnings  from  operation.  To  this  sum  was 
added  the  net  income  from  invest  incuts,  and  the  result  obtained  was  called  the 
•'Total  Available  Corporate  Income.'*  From  this  result  three  items  were  deducted, 
namely,  "Rente  of  Michigan  property  not  included  in  Cooley  Appraisal."  "Interest 
on  Interest-Bearing  Current  Liabilities."  and  "Permanent  Improvements  in  Michigan 
charged  to  Income."  This  process  of  calculation  resulted  in  either  a  "Surplus  from 
Operation"  or  "Deficil  from  Operation."  The  "Mean  Value  of  Physical  Elements," 
computed    from    the   Cooley    Appraisal,   was   a    figure  obtained   to  correspond   to   the 

average    ai ml    of    physical    properly    in    use    by    the    railroad    company    during    the 

period  of  years  for  which  the  average  of  gross  earnings  and  operating  expenses  was 
taken.  ( >n  this  mean  valuation  a  tax  of  1%,  plus  an  annuity  of  4%,  was  com- 
puted, and  the  sum  of  such  tax  and  annuity  deducted  from  the  "Surplus  from 
Operation,"  resulting  in  either  a  "Net  Corporate  Surplus"  or  Deficit,  This  difference 
or  net  corporate  surplus  was  then  capitalized  at  various  rates  in  the  case  of 
different  properties,  ranging  from  -\',',  to  10%  according  to  the  security  of  the 
business  of  the  specific  company  under  investigation.  In  order  that  Professor 
Adams's  method  mas  ,"'  more  clearly  understood,  the  following  form,  taken  from 
his  estimate  of  the  property  of  the  Chicago  and  Northwestern  Railway,  is  inserted 
below  : 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  1:!'' 

Chicago  and  Northwestern  Railway. 

Average  for  ten  years: 

Gross   earnings   from   operation $  1,971,951 

Operating  expenses  exclusive  of  taxes 1,244,748 

Net  income  from  operation $      727,203 

Net  income  from  investment 46,800 

Total  available  corporate  income $      774,003 

Rents  of  Michigan  property  not  included  in  Cooley  Appraisal  0 

Interest  on  interest-bearing  current  liabilities 0 

Permanent  improvements  in   Michigan  charged  to  income.....*?  12,000 

Total  deductions  from  corporate  income 12,000 


Surplus   from   operation $      762,063 


Mean    value    of    physical    elements     (computed    from    Cooley 
Appraisal  >      $12,239,214 


■v 


Corporate  surplus  from  operation $      762.063 

Tax  of  1%  allowed  on  mean  value  of  physical  elements $  122,392 

Annuity  of  4%  allowed  on  mean  value  of  physical  elements.  . .  489,569 

Sum  of  tax  annuity 611,961 


Net   corporate   surplus $      150,102 

Capitalization   of  net  corporate  surplus   at  7%,  giving  value 

of  non-physical   elements $  2,144,314 

( 'ooley  Appraisal  of  physical  elements 13,106,048 

Present  value  of  property $15,250,362 

It  will  be  observed  that  at  any  stage  of  this  process  a  deficit  might  result,  and 
where  such  was  actually  the  case  the  physical  value  as  found  by  Professor  Cooley 
was  substituted  as  the  entire  value  of  the  property.  Much  valuable  correspondence 
with  railroad  companies,  as  well  as  the  results  of  individual  research,  were  trans- 
mitted by  Professor  Adams  to  this  office. 

The  results  obtained  by  Ex-Commissioner  Robert  Oakman  in  his  capitalization 
of  the  net  earnings  of  railroad  property  are  shown  in  the  last  report  of  the  com- 
mission and  form  another  part  of  the  investigation  carried  on  during  the  progress 
of  the  Michigan  Railroad  Appraisal.  Ex-Commissioner  Campbell  pursued  the  study 
of  the  stocks  and  bonds  of  the  companies,  and  his  results  are  also  shown  in  the 
report  of  this  board  for  1900. 

The  dates  of  incorporation  of  the  various  companies,  with  correct  corporate  titles. 
wore  obtained  from  the  office  of  the  Secretary  of  State,  and  much  general  informa- 
tion bearing  upon  the  history  of  the  companies  was  received  from  the  office  of 
the  Railroad  Commissioner.  Reports  of  Michigan  railroad  companies  to  the  Inter- 
state Commerce  Commission  were  obtained  and  the  records  from  thirty  different 
states  of  the  Union  with  regard  to  the  valuation  and  assessment  of  railroad  prop- 
erty   consulted. 

Out  of  these  large  and  varied  sources  it  became  possible  to  evolve  ideas  of  the 
value  of  every  individual  railroad  property  in  Michigan,  the  results  in  all  cases 
being  no  more  arbitrary  than  the  value  arrived  at  between  a  purchaser  and  seller 
in  any  cash  transaction.  It  is  of  course  difficult  to  arrive  at  the  "cash"  value  of 
railroad  property  when  it  is  reflected  that  not  one  such  property  in  a  thousand  is 
sold  for  a  purely  cash  consideration,  the  usual  transfer  of  securities  invariably 
accompanying  any  such  operation. 


140  REPORT  OF   COMMISSION    ON    REVEN1  E   AKl>  TAXATION. 

The  State  then  proceeded  to  levy  taxes  on  the  a ed  valuation  as 

reported.  Bui  the  railroads  refused  to  pay  the  taxes  bo  levied  and  paid 
only  the  amounts  which  would  have  been  due  under  the  old  specific 
taxes.  After  long  litigation,  the  United  States  Supreme  Court  held  in 
April.  1906,  that  the  railroads  should  pay  the  ad  valorem  tax.  The 
taxes  levied  under  the  ad  valorem  plan  were  nearly  double  those  of  the 
gross  earnings  plan.  Bui  it  should  be  borne  in  mind  that  the  Michi- 
gan tax  rates  <.n  gross  earnings  were  very  low. 

Th<-  following  table  shows  how  these  compared: 

Tiixi-^  Levied  Under       Taxes  Paid  on 
Ad  Valorem  Plan.        Gross   Earnings. 

[902 '$3,288,162  06  $1,676,604  08 

L903  3.756,149  12  L,861,099  38 

1904 ..- 3,330,350  59  1,772,838  29 

The  Michigan  Commission  also  made  an  estimate  of  the  value  of  the 
railroads  on  the  "stock  and  bond  plan.''  In  general,  this  plan  of  val- 
uation is  to  take  the  sum  of  the  outstanding  securities  representing  the 
railroad  property  at  market  value,  or  where  the  securities  are  not  quoted 
in  the  market,  at  a  value  determined  by  their  earnings  or  by  a  rough 
appraisal  of  the  properties  they  represent,  which  is  considered  as  repre- 
senting the  market  value.  In  its  main  features  this  plan  is  similar  to 
that  used  by  the  United  States  Census  office  for  determining  the  "  com- 
mercial value"  of  railroads.     (See  Census  Bulletin  No.  21.) 

This  method  gave  a  total  valuation  for  all  Michigan  railroads  of 
$391,553,500,  against  $202,212,200.  the  amount  found  by  the  appraisal, 
or  the  Cooley-Adams  estimate,  a  difference  of  *1S<).341 .300.  The  Mich- 
igan board  seem-  to  have  made  no  use  of  the  figures  compiled  in  regard 
to  -took  and  bond  values. 

The  ••  Michigan  Railroad  Appraisal"  is  the  most  extensive  and  most 
elaborate  attempt  ever  math-  by  a  State  hoard,  or  assessors,  or  any 
other  governmental  authority,  to  arrive  at  the  value  of  the  railroads  in 
:,  concrete  manner.  It  has  been  criticise.  1  as  a  method  of  putting  a  tax 
on  the  earnings  under  the  guise  of  a  tax  on  value,  inasmuch  as  the 
earnings  were  used  in  arriving  at  the  value.  Mr.  Win.  YV.  Baldwin 
said  of  it  in  a  paper  before  the  American  Economic  Association: 

PB  M7TICAL    APPLIO  mOM   OF    Ml  Tlloti. 

I  he  method  <>f  administering  this  process  -hews  that  it  is  really  an  income  tax.  the 
Bize  ef  which  i-  determined,  not  by  the  law,  bul  by  th6  expert's  opinion  of  what  rate 
,,f  return  be  thinks  the  owners  ought  to  be  satisiie.l  with,  taking  into  consideration  the 
prevailing  price  of  Brst-mortgage  railroad  bonds,  and  other  evidence.  The  rat.'  decided 
upon  for  the  Michigan  Central  was  3J  .ami  the  method  pursued,  as  I  understand  it. 
was  this: 

The  net  income  <>f  thai  company  for  Michigan  was  said  to  lie  $2,503,345.  This  income 
was  divided  into  two  parts.  The  greater  part  (f  1,590,352)  was  capitalized  al  3)  ,  as  in 
hi-  opinion  this  particular  company  should  be  content  with  thai  rate  of  return  upon  its 
capital  to  the  extenl  oi  $43  138,599,  because  that  sum  represents  the  estimated  cost  of 


REPORT   OP    COMMISSION    ON   REVENl'E    AND    TAXATION.  141 

reproduction,  in  present   form,  of  all  its  property  as  determined  by  expert   engineer 
Cooley  and  his  investigations. 

The  remainder  of  income  ($913,000)  was  then  capitalized  at  5%,  producing  $18,^59,880, 
which  being  added  to  the  property  value  produces  $63,608,479  as  a  tax  valuation  recom- 
mended to  the  State  board.  Upon  this  theorized  valuation  there  was  to  be  levied,  not 
the  tax  rate  to  be  paid  by  other  property  in  Michigan  in  proportion  to  value,  hut  sub- 
stantially double  such  rate.  The  rate,  in  fact,  levied  on  all  railroads  was  over  sixteen 
and  one-half  mills  on  the  dollar.  Professor  Adams  expressed  the  opinion  that  the 
property  in  fact  assessed  in  Michigan  was  assessed  at  65%  of  value,  and  deduced  there- 
from the  conclusion  that  the  true  average  rate  of  taxation  was  ten  mills;  yet  this  rail- 
road property,  being  first  given  an  exaggerated  valuation,  then  had  levied  upon  it  a  rate 
of  sixteen  and  one-half  mills. 

Nevertheless,  it  appears  to  be  about  the  only  method  other  than  the 
stock  and  bond  method  for  accurately  determining  the  values.  The 
greatest  objection  to  it  is  the  wide  discretionary  power  it  vests  in  the 
assessing  body. 

The  experience  of  Michigan  is  extremely  instructive,  in  that  the 
change  of  system  increased  the  revenue  from  the  railroads.  It  remains 
to  be  seen  whether  the  high  valuations  can  be  maintained  for  any  con- 
siderable period  of  time. 

The  Wisconsin  system. 

Wisconsin,  like   Michigan,   has  recently    abandoned    her    old    gross 

earnings  tax  on  railroads  which  was  established  in  1854.     This  tax  as 

it  existed  in  1897  was  called  an  annual  license  fee;  the  rates  were: 

4%  on  gross  earnings  of  $3,000  per  mile  or  over. 

3£%  on  gross  earnings  from  $2,500  to  $3,000  per  mile. 

3%  on  gross  earnings  from  $2,000  to  $2,500  per  mile. 

$5.00  per  mile  when  gross  earnings  are  from  $1,500  to  $2,000  per  mile  and 

2£%  of  earnings  in  excess  of  $1,500. 
$5.00  per  mile  when  gross  earnings  are  less  than  $1,500  per  mile. 

We  fail  to  find  a  clear  definition  in  the  law  of  what  constitutes  tax- 
able gross  earnings,  or  any  certain  indication  as  to  how  interstate 
earnings  were  treated.  The  compiler  of  the  Review  of  Railroad 
Taxation  for  the  Interstate  Commerce  Commission  appears  to  have 
encountered  the  same  difficulty. 

No  ruling  by  any  department  of  the  State  government  or  by  the  courts  of  the  State 
has  been  made  as  to  what  proportion  of  the  gross  earnings  shall  be  subject  to  the  Stale 
tax  or  license  fee.  In  practice  it  is  claimed  by  the  officers  of  the  railroad  companies 
operating  in  the  Btate,  that  the  gross  earnings  reported  to  the  State  Treasurer  under 
Section  1211  of  the  Statutes  of  1898  include  earnings  from  State  and  interstate  traffic 
earned  within  the  Stale,  and  |  he  amount  of  gross  earnings  so  reported  by  the  respective 
roads  is  usually  accepted  by  the  state  Treasurer  in  computing  the  license  fees  to  be 
paid.* 

The  matter  has  been  inure  or  less  in  litigation,  but  the  quest  inn  at 
issue  seems  to  have  been  whether  "rebates"'  paid  by  the  railroads  were 
to  be  considered  part  of  the  gross  earnings. 

•Footnote  I,  p.  452,  Part  V.  "Railways  in  the  United  Btates  in  L902,"  interstate 
Commerce  Commission. 


142  REPORT   OF   COMMISSION   ON   REVENUE    AND   TAXATION. 

In  IS1.!'.)  a  movement  similar  to  that  in  Michigan  ill  favor  of  an  ad 
valorem  tax  culminated  in  the  appointment  of  a  tax  commission  to 
cxiTiitr  certain  parts  of  the  existing  law  s  and  to  investigate  the  work- 
ings of  the  entire  system  with  a  view  to  reform.  This  commission,  con- 
sisting of  three  members,  one  at  a  salary  of  $5,000  and  two  at  $4,000 
per  annum  (in  1905  the  salaries  were  made  uniform  at  $5,000), 
appointed  for  ten  years  (in  1905  the  term  was  made  eight),  is  the  central 
feature  of  the  Wisconsin  scheme.  The  idea  seems  to  he  that  the  admin- 
istration of  the  tax  system  must  he  above  politics  and  beyond  the 
influence  of  any  of  the  "  interests"  affected. 

One  of  our  correspondents,  whose  judgment  is  undoubtedly  of  the 
best,  but  who.  for  reasons  set  forth  above,  desires  not  to  be  named,  says: 
■  My  impression  is  that  it  is  no  exaggeration  to  say  that  we  have  the 
best  taxing  machinery  in  the  United  States.  We  have  as  our  highest 
tax  authority  the  Wisconsin  Tax  Commission,  composed  of  able  men 
appointed  for  a  long  period  with  a  high  salary.''  He  commends  the 
ad  valorem  tax  for  use  when  it  can  be  administered  in  such  a  manner. 
The  commission  reported  in  1903  strongly  recommending  that  the 
gross  earnings  tax  be  abandoned  and  the  ad  valorem  system  adopted,  a 
recommendation  that  was  somewhat  a  foregone  conclusion,  from  the 
fact  that  the  commission  was  appointed  to  that  end.  Figures  were 
compiled  showing  the  market  value  of  the  railroads  on  the  "stock  and 
bond  basis  "  at  average  quotations  for  seven,  five  and  three  years,  also 
the  value  obtained  by  capitalizing  the  average  earnings  for  five  years, 
at  6%.  These  two  methods  gave  values  that  were  not  very  far  apart. 
If  the  average  rate  of  State  taxation  were  applied  to  this,  the  commis- 
sion showed  that  the  taxes  could  be  increased  from  $1,700,000  per 
annum,  which  the  gross  receipts  tax  yielded,  to  over  $'2,600,000  per 
annum.  After  a  vigorous  campaign,  led  by  Governor  La  Follette,  a 
law  was  passed  in  1903  inaugurating  the  ad  valorem  system.  To  make 
certain  of  some  revenue,  in  the  event  of  litigation,  the  old  license  tax 
on  gross  earnings. was  continued  until  1909,  with  the  proviso  that  if  the 
ad  valorem  tax  on  any  railroad  proved  to  be  greater  than  the  license 
tax  the  railroad  would  be  required  to  make  up  the  difference,  if  less 
the  State  would  remit  the  difference. 

During  the  campaign  for  the  ad  valorem  tax.  the  railroads,  in  oppos- 
ing the  new  system,  vigorously  supported  the  old  gross  receipts  tax. 
Their  chief  arguments  were  the  simplicity,  certainty,  and  ease  of  that 
method.  Since  then  they  have  been  lighting  the  ad  valorem  tax  in  the 
courts,  and,  in  view  of  a  more  rigorous  interpretation  of  the  old  gross 
receipts  tax,  have  also  questioned  the  constitutionality  of  that  tax  law. 
Recent  decisions  in  the  State  courts  have  sustained  the  new  law.  The 
objections  were  based  on  special  provisions  of  the  Wisconsin  constitution. 
(See  Chicagoand  Northwestern  Railway  Co.  vs.  State  of  Wisconsin.) 


REPORT   OF   COMMISSION   ON   REVENUE    AND   TAXATION.  143 

The  Wisconsin  commission  does  not  divulge  the  exact  methods  used 
by  it  in  ariving  at  the  value  of  the  railroads.  It  took  the  stand,  in  the 
courts,  that  if  the  assessments  were  wrong  the  burden  of  proof  was  on 
the  railroads.  But  it  is  pretty  well  understood  that  the  valuation  is 
made  by  a  combination  of  the  "  stock  and  bond  method  "  with  "  capitali- 
zation of  earnings."  This  is  obvious  from  a  comparison  of  the  assess- 
ment in  1904  with  the  estimates  published  in  their  report  of  1903. 

As  in  Michigan,  so  in  Wisconsin,  the  success  of  the  ad  valorem  tax 
rests  entirely  on  the  commission.  That  body  carries  an  enormous 
responsibility  and  exercises  the  widest  discretionary  power.  It  deter- 
mines the  methods  by  which  both  the  value  of  the  railroad  and  the 
true  value  of  the  property  throughout  the  State  are  to  be  determined. 
Upon  these  two  facts  depend  the  yield  and  burden  of  the  tax.  Three 
men  with  salaries  of  $5,000  per  annum  can  at  their  discretion  add  to 
or  subtract  from  the  taxes  on  the  railroads  a  million  or  more  dollars  in 
any  one  year.  To  safeguard  this  commission  from  political  changes 
the  Wisconsin  law  now  provides  that  the  term  of  each  member  shall 
be  eight  years,  and  that  only  one  vacancy  shall  occur  in  any  one  year 
and  only  at  two-year  intervals.  It  thus  takes  eight  years  with  the 
continued  cooperation  of  the  Governor  and  the  Senate  to  make  a  com- 
plete change  in  the  commission,  or  six  years  to  gain  a  majority. 

It  will  be  observed,  that  there  is  a  striking  resemblance  between  the 
principle  of  the  Michigan  and  Wisconsin  systems,  and  the  method  now 
in  vogue  in  California.  The  California  State  Board  of  Equalization 
has  substantially  the  same  power  as  the  Wisconsin  Tax  Commission. 
The  difference  is  that  the  Wisconsin  tax  on  railroads  is  a  State  tax 
exclusively  and  that  the  rate  is  the  average  rate  of  all  taxes  paid  in 
the  State.  While  in  California  the  assessment  made  by  the  State 
Board  of  Equalization  is  apportioned  among  the  counties  and  is  subject 
to  local  as  well  as  State  taxes. 

In  1904  the  railroads  were  still  paying  the  gross  earnings  tax  and 
striving  to  prevent  collections  of  the  ad  valorem  tax.  The  amount 
paid  was  only  $285  per  mile. 

4.  The  introduction  of  the  gross  earnings  tax  in  Virginia. 

Virginia. 

Railroads  in  Virginia  were  formerly  subject  to  two  general  taxes; 
one  on  property  and  one  on  income.  The  income  was  determined  "by 
deducting  the  cost  of  operation,  repairs,  and  interest  on  indebtedness 
from  gross  receipts." 

The  tax  on  the  property  was  of  the  type  common  in  the  Southern 
States.  The  property  was  assessed  mainly  on  the  basis  of  a  sworn 
report  by  the  company  and  the  rates  were  fixed  by  statute  and  not 
subject  to  frequent  change. 


HI  REPORT  OF   COMMISSION   ON  REVENUE   AND   TAXATION. 

The  Income  tax  was  a  pari  of  the  genera]  income  tax  of  the  State 
and  appears  to  be  in  intention  a  tax  mi  the  stockholders,  the  tax  being 
"stopped  at  the  source"  after  the  manner  of  the  British  income  and 
property  tax.     The  rate  was  l    . 

In  1901  1902  a  constitutional  convention  was  held  in  Virginia  and 
the  new  constitution  prepared  thereby  went  into  effect  in  July,  1902. 
The  new  constitution  provided  for  the  separation  of  State  from  local 
taxation. 

So  far  as  railroads  are  concerned  the  old  property  tax  was  continued 
in  force  with  some  modifications  and  the  income  tax  was  changed  to 
a  gross  earnings  tax.  The  following  is  a  condensed  copy  of  the  pro- 
visions in  regard  to  the  gross  earnings  tax: 

"Sec.  177.  Bach  *  *  *  railway  *  *  *  corporation,  *  *  *  shall 
also  pay  an  annual  State  franchise  tax  equal  to  one  per  centum  upon 
the  gross  receipts  *  *  *  for  the  privilege  of  exercising  its  franchises  in 
this  State  which,  with  the  taxes  provided  for  in  Section  17t>  (the  prop- 
erty tax),  shall  he  in  lieu  of  all  other  taxes  or  license  charges  whatso- 
ever upon  the  franchises  of  such  corporation,  the  shares  of  stock  issued 
by  it,  and  upon  its  property  *  *  *."  (An  annual  fee  of  from  $5  to 
$25,  elsewhere  provided  for,  was  excepted  from  the  "in  lieu  of  clause.) 

"Sec.   178.     The  amount  of  such  franchise  tax  shall  he  equal  to  one 

per  centum  of  the  gross  transportation  receipts  of  such  corporations  for 

the  year  ending  June  the  thirtieth  of  each  year,  to  be  ascertained  by 

the  State  Corporation  Commission,  in  the  following  manner: 

■  I  -/ 1  When  the  road  or  canal  of  the  corporation  lies  wholly  within  this  State,  the  tax 
shall  be  equal  to  one  per  centum  of  the  entire  gross  transportation  receipts  oi  Buch  cor- 
poration. 

"(/-I  When  the  road  or  canal  of  the  corporation  lies  partly  within  and  partly  without 
this  State,  or  is  operated  as  a  part  of  a  line  or  system  extending  beyond  this  State,  the 
tax  shall  he  equal  to  one  per  centum  of  the  gross  transportation  receipts  earned  within 
this  Mate  to  he  determined  as  follows:  By  ascertaining  the  average  gross  transportation 
receipts  per  mile  over  its  whole  extent  within  and  without  this  State,  and  multiplying 
the  result  by  the  number  of  miles  operated  within  this  State;  proridrtl,  that  from  the 
sum  BO  ascertained  there  may  be  a  reasonable  deduction  because  of  any  excess  of  the 
value  of  the  terminal  facilities  or  ot her  similar  advantages  in  other  states  over  similar 
facilities  or  advantages  in  this  State." 

The  courts  were  vested  with  full  discretionary  power  to  revise  the 
assessment  on  application  by  the  railroad. 

By  an  acl  approved  in  1903  the  provisions  of  the  Constitution  were 
carried  into  effect.  The  result  was  an  increase  in  the  earnings  tax 
from  $13,218  in  1903  to $308,413  in  1904. 

5.  Partial  gross  earnings  taxes  in  Texas  and  Illinois. 

Texas. 

This  State  imposes  an  "occupation  tax.""  as  part  of  its  general  tax 
system,  of  1%  on  gross  receipts  from  all  their  passenger  trallic  within 
the  Slate.      In  1904  the  revenue  from  this  source  was  about  $97,000. 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  145 

Illinois. 

This  State  taxes  most  railroads  under  the  general  property  tax  with 
little  recognition  of  the  difference  between  the  character  of  railroad 
property  and  other  property. 

But  by  the  charter  of  the  Illinois  Central  it  is  "  provided  that  in  con- 
sideration of  grants,  privileges,  and  franchises  conferred  upon  it,  it 
shall  pay  into  the  treasury  of  the  State  on  the  first  Monday  of 
December  and  June  of  each  year  5%  of  the  gross  receipts  or  income 
derived  from  the  six  months  next  then  preceding.  For  the  purpose  of 
ascertaining  the  receipts,  an  accurate  account  must  be  kept  by  such  com- 
pany and  a  copy  thereof  furnished  to  the  Governor  of  the  State.  The 
truth  of  this  account  must  be  verified  by  the  affidavits  of  the  treasurer 
and  the  secretary  for  the  purpose  of  verifying  and  ascertaining  the 
accuracy  of  such  account,  power  being  given  for  the  examination  of  the 
books  and  papers,  and  for  examination  under  oath  of  officers,  employes, 
and  employers  of  said  company,  or  other  persons. 

"It  was  further  provided  that  lands  selected  by  Act  of  Congress  and 
authorized  to  be  transferred,  should  be  exempt  from  taxation  until 
conveyed,  and  that  other  stock,  property,  and  effects  of  said  corporation 
should  be  exempt  from  taxation  for  six  years  from  passage  of  the  act. 
After  six  years  said  property  must  be  listed  with  the  auditor  of  the 
State  and  an  annual  tax  is  assessed  thereon  by  the  auditor.  Whenever 
the  taxes  so  levied  for  State  purposes  exceed  three  fourths  of  one  per 
cent  per  annum,  such  excess  is  deducted  from  the  percentage  of  the 
gross  receipts  required  to  be  paid,  and  it  is  exempted  from  all  other 
taxation  of  every  kind.  But  it  is  further  provided,  that  in  case  the  5% 
on  gross  receipts  and  the  State  taxes  above  provided  for  and  paid  into 
the  State  treasury  do  not  amount  to  7%  of  the  gross  proceeds,  then  the 
company  shall  pay  into  the  State  treasury  the  difference,  so  as  to  make 
the  amount  paid  equal,  at  least,  to  7%."* 

The  road  has  paid  7%  annually  ever  since  1857. 

6.  Taxation  of  railroads  in  New  York  and  New  Jersey. 

The  methods  of  railroad  taxation  in  these  two  states  arc  especially 
interesting.  That  of  New  York  can  be  understood  only  when  described 
as  a  whole,  hence  it  could  not  be  introduced  in  the  above  analysis. 
That  of  New  Jersey  has  bad  a  recent  overhauling  to  which  the  widest 
publicity  has  been  given. 

New  York. 

As  will  be  seen  in  the  table  quoted ^from  the  Interstate  Commerce 
Commission,  railroads  in  New  York  pay  all  live  of  the  taxes  classified 
by  that  commission.     Professor  C.  J.  Bullock,  of  Harvard,  a  keen,  crit- 


■  interstate  Commerce  Commission  Review  of  Railroad  Taxation,  [>]..  2ln  21 1. 
10  — RT 


146  REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 

ical  atudenl  of  AmericaD  finance,  says  of  the  New  York  Bystem:  "  Xew 
York  has  devised  what  lias  been  called,  justly,  the  most  complicated 
and  clumsy  methods  known  for  taxing  corporations." 

The  complexities  in  the  New  York  plan  are  due  to  historical  condi- 
tions, to  the  gradual,  piecemeal  development  of  taxation  in  that  State, 
and  to  the  constanl   resistance  of  certain  interests  to  taxation  in  any 

form. 

The  principal  tax  on  railroads  is  the  local  tax  for  town,  county,  and 
school  purposes,  on  all  the  property.  This  is  the  old  general  property 
tax  no  longer  largely  used  in  New  York  to  supply  State  revenue,  but 
modified  in  one  particular  for  application  to  railroads.  This  modifica- 
tion [8  thai  the  "special  franchises"  are  assessed  by  the  State  Tax 
Commissioners  and  apportioned  to  the  towns  through  which  each  rail- 
road runs.  Under  the  old  general  property  tax  law  of  New  York  all 
taxpayers  were  orginally  permitted  to  deduct  the  amount  of  their 
indebtedness  from  the  whole  amount  of  their  personal  property  (not 
merely  from  credits,  as  in  California).  Under  the  law  railroads  for- 
merly deducted  their  enormous  bonded  indebtedness  from  their  personal 
property,  which  included  franchises,  and  hence  paid  practically  no 
taxes  except  on  real  estate.  After  somewhat  of  a  struggle  the  reformers, 
under  the  leadership  of  Theodore  Roosevelt,  then  Governor,  amended 
the  law  in  1899  so  as  to  define  "special  franchises"  as  real  estate,  thus 
making  it  possible  to  tax  railroads  on  an  amount  supposed  to  more 
nearly  represent  their  taxable  property.  These  "special  franchises" 
are  described  in  the  law  as  "  rights  or  permission  to  construct,  main- 
tain, or  operate  the  same  {i.  e.,  railroads,  surface,  underground,  or 
elevated)  in,  under,  above,  on,  or  through  streets,  highways  or  public 
places."  The  special  franchise  further  includes  "the  valuable  of  the 
tangible  property  of  a  person,  co-partnership,  association,  or  corpora- 
tion, situated  in,  upon,  under,  or  above  any  street,  highway,  public 
place,  or  public  waters  in  connection  with  the  Bpecial  franchise." 

The  same  provisions  cover  street  railroads,  which  are  thus  assessed 
almost  wholly  by  the  State  Tax  Commissioners.  Steam  railroad-  are 
alB0  assessed  on  their  tracks,  stations,  etc.,  by  the  local  assessors  and 
only  where  they  cross  public  highways,  by  the  State  Tax  Commission. 
In  addition  to  the  local  taxes  on  their  property  in  general,  the  rail- 
road- pay  to  the  State  several  specific  taxes:  (1)  The  most  important 
0f  these  ie  the  annual  franchise  tax,  levied  on  all  corporations  upon  the 
basie  of  the  capital  stock  employed  in  the  State.  The  rate  is  one  fourth 
of  one  mill  for  each  1  ;  of  dividends  of  6  or  upwards.  If  the  dividend 
declared  ie  less  than  6    .  the  tax  is  one  and  one  half  nulls. 

(2)  Tie-re  i-  an  additional  franchise  tax  on  railroads  and  all  trans- 
portation  and   transmission   companies  as  "a  license  for  the  exercise  of 


REPORT    OF    COMMISSION    OX    KEYKXTE    AND    TAXATION.  147 

theiv  franchises  in  the  State."  This  tax  applies  to  this  class  of  corpora- 
tions only  and  not  as  the  above  to  all  corporations  including  railroads. 
This  tax  is  levied  on  the  "gross  earnings  within  the  State,  which  shall 
include  its  gross  earnings  from  its  transportation  or  transmission  busi- 
ness originating  and  terminating  within  this  State,  but  shall  not  in- 
clude earnings  derived  from  business  of  an  interstate  character."  The 
rate  for  most  transportation  and  transmission  companies  is  five  tenths 
of  1%.  The  rate  for  a  similar  tax  on  elevated  railroads,  or  surface 
railroads  not  operated  by  steam,  is  1%  on  the  gross  earnings  and  3%  on 
the  amount  of  dividends  in  excess  of  4%  on  the  actual  paid-up  capital. 

(3)  There  are  a  number  of  lesser  taxes  or  fees  such  as  the  organiza- 
tion tax  of  one  twentieth  of  1%  on  the  amount  of  capital  of  domestic 
corporations  and  one  eighth  of  1%  of  capital  employed  within  the  State 
by  foreign  corporations,  and  the  tax  for  the  support  of  the  railroad 
commission. 

This  complicated  system  contains  little  that  is  instructive  for  our 
purpose. 

The  New  Jersey  reform  movement. 

Before  the  recent  reforms  in  New  Jersey,  which  have  been  given  so 
much  publicity  in  the  magazines  and  newspapers,  that  State  had  a 
complex  system  of  railroad  taxes,  based  in  the  main  on  property. 

The  property  of  railroads  was  taxed  substantially  according  to  the 
following  plan:  All  real  estate  of  railroads  which  is  held  in  anticipation 
of  future  use,  but  is  not  actually  at  the  present  time  devoted  to  rail- 
road purposes,  is  taxable  locally  by  the  local  assessors  at  local  rates. 
All  other  property  of  the  railroads  is  by  the  railroad  tax  law  divided 
into  four  classes: 

1.  The  main  stem  property  (so  called),  consisting  of  the  main  line  of 
each  railroad  company  not  exceeding  one  hundred  feet  in  width,  and 
including  the  passenger  station. 

2.  The  second-class  railroad  property  (so  called),  consisting  of  the 
real  estate  used  for  railroad  purposes,  not  included  in  the  classification 
of  the  main  stem. 

3.  All  personal  property  of  railroads  and  canal  companies,  such  as 
cars,  locomotives,  tools,  implements,  boats,  etc. 

4.  The  franchises. 

The  foregoing  classes  of  property  are  required  by  law  to  be  separately 
assessed  by  the  State  Board  of  Assessors.  Upon  the  main  stem,  personal 
property  and  franchises  is  to  be  levied  an  annual  tax  of  one  half  of  1%, 
which  goes  to  the  State.  Upon  the  second  class  is  to  be  levied  an 
annual   tax   at   a    rate   not  exceeding   1^%,   which   is   paid    in  tin-  first 


1  \S  REPORT   OF   COMMISSION    ON   REVENUE   AND   TAXATION. 

instance  to  the  State  and  by  the  State  forwarded  to  the  municipality  in 

which  the  said  property  is  situated. 

While  there  was  some  criticism  of  the  ■  d  valuations  placed  on 

railroad  property,  the  chief  complaint  was  in  regard  to  the  limitation 
of  the  rate,  which  was  fixed  at  one  half  of  1  on  the  main  stem  and 
H  on  the  second  class  of  railroad  property.  Governor  stokes  is 
authority  for  the  Btatemenl  thai  "the  average  tax  rate  of  this  State  is 
aboul  •/." 

"Equal  taxation"'  was  the  catchword  in  this  campaign,  but  as  will  be 
seen  from  the  above  it  had  a  very  different  meaning  in  New  Jersey  from 
that  given  it  in  Michigan  and  Wisconsin.  The  main  issue  that  rail- 
roads should  pay  taxes  as  heavily  as  other  property  having  been  won, 
the  contest  finally  simmered  down  to  the  issue  whether  the  "main 
Stem"  should  be  taxed  at  the  average  rate  of  taxes  on  all  property 
throughout  the  State  and  the  taxes  collected  thereon  by  the  State  dis- 
tributed among  all  the  towns  whether  traversed  by  the  main  stem  or 
not;  or  whether  that  part  of  the  railroad  property  should  be,  after 
assessment  by  the  State  hoard,  taxed  in  each  town  and  city  through 
which  it  runs.     The  former  plan  was  adopted. 

It  was  estimated  by  Governor  Stokes  in  his  first  annual  message  to 
the  Legislature  that  this  plan  would  raise  the  taxes  on  New  Jersey 
railroads  from  about  $2,091,000  to  about  $4,940,000.  If  that  expectation 
be  realized  the  taxes  on  railroads  in  New  Jersey  will  amount  to  nearly 
$2,000  per  mile.  This  will  be  the  highest  rate  in  any  State,  the  next 
being  Massachusetts,  with  $1,426  per  mile. 

Summary  of  the  foregoing  analysis  of  railroad  taxation  in  other 
states. 

If  we  assume  that  there  should  be  separation  of  State  from  local 
taxation,  and  that  railroads  should  be  taxed  exclusively  for  State  pur- 
poses,  there  seem  to  be  three  distinct  methods  which  have  been  tried  in 
other  states.     These  are : 

1.  A  tax  based  on  capitalization,  of  which  the  Connecticut  tax  is 
the  best  example. 

L\  A  tax  based  on  an  appraisal  of  property,  of  which  Michigan  and 
Wisconsin  furnish  examples. 

:'..  A  tax  based  on  gross  earnings,  of  which  there  are  two  distinct 
types : 

(a)  Like  that  of  Maine,  where  all  gross  earnings  of  a  given  road 

or  system,  both  in  and  out  of  the  State,  are  apportioned:  the  State 

taxing  its  proportion  of  the  whole. 

(b)  Like   that    of    .Minnesota,   where   only   the   gross  earnings  of 
interstate   traffic    are   apportioned:   tin'    State    taxing   all    intrastate 

earnings  and  its  proportion  of  interstate  earnings. 


REPORT    OF    COMMISSION   ON   REVENUE    AND    TAXATION.  149 

1.  The  Connecticut  plan.    Tax  based  on  stock  and  bonds. 

Of  these  three  the  first,  that  of  Connecticut,  has  much  to  commend  it. 
It  yields  a  large  revenue.  It  is  easy  to  administer.  It  imposes  no 
unbearable  load  on  the  companies.  It  is  as  just  and  equitable  as  any 
part  of  our  tax  system. 

The  amount  of  the  tax  is  determined  very  nearly  by  a  mathematical 
rule,  which  leaves  comparatively  little  discretionary  power  in  the  hands 
of  the  administrative  officers.  The  data  upon  which  it  rests  are  matters 
of  common  knowledge  or  of  public  record,  and  the  reports  required 
can  not  easily  be  falsified.  The  results  obtained  can  be  checked  up  by 
any  citizen  who  cares  to  criticise  the  levy,  and  the  correctness  or  error 
thereof  is  easily  proven.  The  officers  in  charge  of  its  collection  are 
under  no  temptation  to  violate  their  duty,  can  protect  themselves  from 
false  charges,  and  their  work  can  be  checked  by  the  regular  auditor  with 
little  trouble  or  expense. 

The  tax  can  be  known  in  advance  by  the  company  with  a  fair  degree 
of  accuracy,  and  provided  for.  It  will  fluctuate  in  the  main  with  the 
property  of  the  company  and  the  value  of  its  holdings. 

Its  constitutionality  has  never  been  questioned.  It  is  as  nearly  as 
may  be  an  accurate  and  scientific  method  of  taxing  the  property  of 
railroads  at  its  market  value.  It  has  the  endorsement  of  a  strong  obiter 
dictum  of  the  Supreme  Court,  (See  State  Railroad  Tax  Cases,  92  U.  S. 
575.  quoted  on  p.  119  above.) 

The  strongest  of  the  objections  sometimes  brought  against  it  is  that 
the  market  value  of  the  shares  of  stock— and  in  extreme  eases  of 
bonds— of  railroads  is  subject  to  manipulation,  or.  what  is  even  more 
important,  may  fluctuate  for  various  reasons  not  strictly  related  to  the 
value  of  the  property  they  stand  for  and  represent.  The  force  of  this 
objection  is  most  clearly  seen  in  the  case  of  a  railroad  whose  securities 
are  subject  to  heavy  speculation.  What  is  wanted  for  the  purposes  of 
taxation  is  that  value  which  most  truly  represents  the  earning  power 
of  the  stock. 

The  causes  for  the  difference  often  seen  between  the  "intrinsic  value" 
as  it  is  sometimes  called  and  the  market  value  as  represented  by  the 
price  on  the  quotations  have  been  stated  as  follows  by  Sereno  S.  Pratt 
in  hifl  book  mi  "The  Work  of  Wall  Street."  p.  59: 

In  the  case  of  a  common  stock  value  is  measured  : 

1.  By  tin-  dividend  it  pays. 

2.  By  the  net  income  of  the  company  after  payment  of  fixed  charges  and  operating 
expenses,  all  such  net  income  belonging  to  the  stock. 

3.  By  1 1 1 •  -  character  of  the  management,  on  which  in  large  measure  depends  the 
continuance  of  dividend  payments. 

What  makes  the  price?  By  price,  of  course,  is  meant  the  sum  of  money  for 
which  a  stock  or  bond  is  sold  in  the  market.     Price,  strictly  speaking,  should   be 


l.")()  BBPOBT   OF   COM  .MISSION    ON    REVENUE  AND  TAXATION. 

value  expressed  la  dollars,  and  quotations  are  prices  as  recorded  on  the  tape  or 
in  the  market  report    The  chief  influences  thai  make  prices  are: 

1.  Intrinsic  value. 

■J.  Current  news,  wliirh  may  not  affect  real  values  in  the  least,  bul  which  Wall 
Street  thinks  may  enhance  <>r  injure  values. 

:;.  The  condition  of  the  market  machinerj  for  speculation.  For  instance, 
stringency  in  the  money-market  may  nol  affect  the  earning  power  of  s  company 
in  the   least,  but    may   temporarily  affect    the  market  price  of  its  stock. 

I.  Manipulation,  or  the  fine  art  of  making  prices  what  the  manipulators  want 
them  to  be,  independent  of  what  they  ought  to  be. 

5.  The  market  supply  of  the  stock  for  speculative  purposes. 

I  [e  points  out  further : 

The  average  prices  of  the  entire  list  may.  for  a  considerable  period,  vary  ureal  ly 
from  the  true  measures  of  value.  Inasmuch  as  values  depend  OH  the  prosperity  or 
tin-  r, ...  .■!■-■  of  the  country,  it  ought  to  follow  that  Wall  Street  prices  should  corre- 
spond to  the  actual  conditions  of  trade.  This  is  always  true  if  the  period  of 
comparison  be  made  long  enough,  but  it  is  not  always  the  case  for  short  periods, 
and  sometimes  not  for  a  year  at  a  time.* 

The  same  objection;  namely,  that  market  value  fluctuates  violently, 
might  he  urged  against  the  assessment  of  any  other  class  of  property 
on  the  basis  of  market  value.  It  is  true  of  land,  of  cattle,  in  fact  of 
everything  but  money.  Speculation  is  not  confined  to  railroad  property. 
The  objection  is,  therefore,  one  against  any  property  tax  based  on  the 
assumption  that  the  taxable  value  can  be  determined  by  reference  to 
the  market  value.  It  does  not  lie  solely  against  the  taxation  of  railroads 
in  this  manner. 

But  the  proper  answer  to  the  objection  is  to  so  frame  the  revenue 
law  that  the  assessing  officials  shall  he  guided  by  the  average  price  of 
the  stock  for  a  considerable  period  of  time— at  least  one  year— and 
not  be  bound  by  its  price  on  a  given  day.  There  would  be  no  danger 
and  nothing  unreasonable  in  allowing  them  to  ignore  entirely  such 
violent  fluctuations  as  marked,  for  example,  the  Northern  Pacific  stock 
in  1901.  The  difficulty  has  been  greatly  exaggerated,  and  is  one  which 
can  be  readily  met  and  overcome  by  the  application  of  common  sense 
methods  used  in  assessing  other  classes  of  property.  It  is  an  advantage. 
rather  than  a  disadvantage,  that,  in  the  case  of  railroads,  there  are 
fiv.|in 'lit  stock  quotations  available. 

The  application  of  this  method  to  some  of  the  Leading  railroads  in 
California  presents  a  number  of  Bpecial  and  peculiar  difficulties. 

One  difficulty  is  that  the  stock  of  many  of  these  roads  is  held  in  the 
treasury  of  some  central  controlling,  or  operating  company,  or  in  the 
treasuries  of  the  various  proprietary  companies  and  never  appears  in 
the  market. 

*  Prat  i.   Work  of  Wall   Street,  p.  GO. 


REPORT   OF   COMMISSION   ON  REVENUE   AND   TAXATION.  151 

Take  the  Southern,  Pacific  System  as  an  example.  The  only  stock 
which  has  a  market  or  quoted  value  is  that  of  the  Southern  Pacific 
Company.  As  the  operations  of  that  company  extend  over  thousands 
of  miles  of  rail  and  water  outside  of  California,  the  determination 
of  what  part  of  the  value  of  the  great  operating  company's  stock  is 
due  to  the  shares  of  the  stock  of  California  railroad  companies  which 
it  holds  is  extremely  difficult  if  not  impossible  to  determine.  The 
matter  becomes  all  the  more  complex  when  we  note  that  some  of  the 
stock  of  California  companies,  notably  that  of  the  Central  Pacific  Rail- 
road, is  hypothecated  to  secure  bonds.  The  outstanding  stock  of  the 
Southern  Pacific  Railroad  of  California,  for  example,  itself  represent- 
ing stock  interests  purchased  in  many  California  companies  which  it 
absorbed,  amounts  to  $101,424,160  par  value.     Of  this  there  is 

Deposited  to  secure  Southern  Pacific  Company  stock $96,740,133 

Deposited  to  secure  Southern  Pacific  Company's  bonds 3,900,000 

Owned  by  the  Southern  Pacific  Company  and  unpledged 138,757 

Amount  owned  by  the  Southern  Pacific  Company. $100,778,890 

"  In  the  hand  of  the  public "  or  used  to  "qualify  "  directors  and 

officers 645,270 

$101,424,160 

The  $96,740,133  par  value  deposited  to  secure  Southern  Pacific  Com- 
pany's stock  is  merged  in  one  indistinguishable  fund  with  the  stocks  of 
other  corporations,  and  the  precise  proportion  which  it  contributes  to 
the  value  of  the  operating  company's  stock  is  no  longer  ascertainable 
with  any  certainty. 

The  only  way  out  of  this  difficulty  would  be  to  assume  that  the 
capital  used  in  California  by  one  of  these  great  railroad  systems,  like 
the  Southern  Pacific  (or  Santa  Fe),  was  represented,  first,  by  those  out- 
standing bonds  which  specially  cover  the  mileage  in  California,  or  by 
the  proper  proportion  of  those  bonds  which  cover  mileage  both  within 
and  without  the  State;  and,  second,  by  that  proportion  of  the  entire 
Southern  Pacific  Company's  stock,  at  market  value,  which  the  mileage 
in  California  bears  to  the  entire  mileage  of  the  system.  The  principal 
objection  to  this  would  be  that  the  three  thousand  odd  miles  in  Cali- 
fornia contribute  more  per  mile  to  the  earnings  and  value  of  the  ten 
thousand  miles  in  the  system  than  most  of  the  outside  mileage.  But 
probably  this  is  offset  in  part  by  the  heavier  bonded  indebtedness  of 
California  roads. 

By  a  Somewhat  rough  estimate,  but  accurate  enough  for  illustrative 
purposes,  we  get  the  following  results  for  the  valuation  of  the  Southern 
Pacific  Company's  property  in  California  by  the  Connecticut  method: 


152  REPORT   OP   COMMISSION   ON   REVENUE   AND   TAXATION. 


Estimate  of  the  Value  of  the  Southern  Pacific  Company's  Railroad  System  in  California, 

on  the  Stock  and  Bond  Basis. 

Eti  fern  as  near  as  may  be  i<>  July  i.  1904.    Fractions  ignored,  and  large  aumbere  taken 
to  the  nearest  1,000.     Mileage  used  ia  the  main  track  only. 

(This  estimate)  prepared  by  the  Becretary  from  the  published  reports,  was  submitted  to  the 
company  for  criticism  and  correction,  bul  do  criticism  was  made.) 

Southern  Pacific  Company. 

Total  mileage  operated '..".78 

Mileage  in  California  :;.:■.:.. . 

Percentage  in  California. 

Stork  outstanding $187,849,000 

Quoted  July  I,  1904,  at  47. 

Market  value  total  stock 92.989,000 

Market  value  36    of  stock  $3:',.470.noo 

Bonds — 

Southern  Pacific  Co.  4's  representing  Central  Pacific 

Btock.    ..     29,618,500 

(Central  Pari  lie  mileage  in  California  is  51%  of  total 
Central  Pacific  mileage.     See  below.) 

51%  covering  lines  in  California . 15,105,000 

Southern  Pacific  Co.4i's... 30,000,000 

96  ,  of  above  covering  Rue  in  California 10.000,000 

Total  for  Southern  Pacific  Co.  in  California $59,381,000 

monand  Colorado  Railway  Co. 

Total  mileage 299 

In  California H>7 

Percentage  in  California 36% 

Bonds  outstanding $2,000,000" 

36%  covering  line  in  California 720,000 

3.  Central  Pacific  Railway  Co. 

Total  mileage 1,400 

In  California 747 

Percentage  in  California 51 

Bom Is  and  notes $117,71 7,i HMi 

51%  covering  line  in  California... <;o.036,000 

4.  South  Pacific  ('oust  Railway  Co. 

Kut i re  mileage  i-  in  California. 

Bonds  outstanding 5.500,000 

5.  Southern  Pacific  Railroad  Co.  (of  California). 

Entire  mileage  is  in  California. 

Bonds  outstanding —         79,502,000 

Grand  total $206,140,000 

Deduct  assessed  value  of  lands 6,000,000 

Estimated  value  of  operative  property,  in  round  numbers $200,000,000 

The  I  value  of  the  Southern  Pacific  System  in  1904  was: 

State  Hoard  of  Initialization $52,097,780 

County.  Less  $6,408,261  lands    12,338.685 

Total $64,436,485 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  153 

Estimate  of  Value  of  That  Part  of  the  Santa  Fe  System  Which  Lies  in  California,  on  the 

Stock  and  Bond  Plan. 
(Prepared  by  the  auditor  for  the  company,  and  published  by  permission.) 

Main  track  mileage,  system 9,26JL 

Main  track  mileage,  California 'iff 

Percentage  of  road  in  California    ...  —  -- 13 

General  Securities  to  be  Apportioned  in  Above  liotio. 

Quotations  as  of  June  30,  1904. 

General  4'*  $146,634,500    at  100    $146,634,50000 

Adius'tn.ent  4>  (un>tanme(l).... 24,525,000    at    94  23,053,500  00 

Adjustments  (stamped) 26,821,000    at    92  24,675,320  00 

Beiial  debentures,  4'8. - 25,000,000   at   96  24,000,000  00 

Eastern  Oklahoma  4's  5,645,000   at   95g  U2,l43  ,.> 

8    F   &S    1    V    Rv   5's                                                     —  6,000,000    at  inn  6,000,000  00 

Chicago  and  St.  Jjouis6's     1,500,000   at  100  1,500,000  00 

C   S   F  &   C    Rv    5's                                         --  •      56(1,1X10    at  100  560,000  00 

H    it  S   Ry's's                                                   --- ---  195,000    at  100  195,000  00 


Common  stock $101,955,500  at    72§  $74,045,181  85 

Preferred  stock 114,173,730  at    93|  107,180,582  65 

P.  V.  &  N.  E.  preferred .„.  $114,000  at    75  $85,500  00 

P.  V.  A-  X.  E.  1st  5's 82,000  at  100  82,000  00 

G.  B.  &  K.  C.  stock 1,400  at    75  1,050  00 

G   B.  &  K    0.1st6's             633,500  at  100  633,500  00 

G.  B.  &  K.  C.  2d  6's 151,000  at  100  151,000  00 

G   B.  &  K.  C.  2d  5's      - — -  205,000  at  100  205,000  00 

S  F  P.  &   P.  1st  5's     4,940.000  at  100  4,940,000  00 

S.  F.  P.  &  P.  2d  5's 1,000  at  100  1,000  00 


$231,930,463  75 
181,225,764  50 


6,099,050  00 


Total  value  of  stocks  and  bonds... ----    $419,255,2,8  25 

Less  value  of  securities  which  do  not  represent  property  used  in  operat- 
ing  owned  and  leased  railroads -   ---      *46,75-,330  00 

Balance,  total  of  securities  to  be  apportioned $372,503,948  25 

California's  portion.  13%  of  above $48, 125,513  00 

The  assessed  value  of  the  Santa  F6  in  1904  was : 

State  Board  of  Equalization *Ul^V^? 

County l,lo2,644 

Total -- $13,065,324 

2.  Taxation  of  railroads  on  ad  valorem  basis.     Michigan  and 
Wisconsin  plan. 

The  second  of  the  three  methods  of  taxing  railroads:  namely,  that  of 
Michigan  and  Wisconsin,  proceeds  on  the  assumption  that  it  is  possible 
to  make  a  sort  of  an  inventory  of  the  property  and  to  value  the  items, 
much  as  one  would  "take  stock"  in  a  store.  As  the  great  railroad 
appraisal  in  Michigan  shows,  there  is  always  a  definite  remnant  of 
"intangible  property"  a  valuation  of  which  requires  a  consideration 
either:  (1)  of  the  value  of  the  stocks  and  bonds,  or  (2)  of  the  earnings. 
That  is.  it  is  necessary  to  ascertain  the  market  value  of  the  securities 
which  represent  the  capital,  which  is  of  itself  dependent  on  the  earn- 
ings, or  to  ascertain  the  earnings  and  by  an  arbitrary  rule  compute 
from  them  the  value  of  the  capital  invested. 

This  method  is  inferior  to  the  Connecticut  method,  in  that  it  uses 
indirectly  what  that  uses  directly.  It  vests  the  taxing  official.-  with 
tremendous  power  and  tn-nn-ndous  responsibilities.  The  State  has 
little  assurance  that  its  interests  will  be  protected  or  that  the  revenue 

*  The  propriety  of  this  deduction  was  questioned  !>>  the  Commission. 


i;,|  REPORT  OP   COMMISSION   <>N"    REVENUE    \NI>   TAXATION. 

from  this  Bource  will  grow  with  thai  regularity  which  it  has  a  right  to 
expect.  The  railroads,  on  the  other  hand,  arc  apt  to  feel  that  they  are 
open  to  attack  at  any  time  ami  have  no  adequate  protection  against 
arbitrary  exactions. 

There  are.  moreover,  certain  distinct  objections  to  the  attempt  to  tax 
railroad  or  corporate  property  in  general  in  the  Bame  way  and  by  the 
same  Btandard  ae  other  property. 

In  the  first  place,  consideration  must  of  necessity  be  given  to  the  fact 
that  railroad  property  is  not  local  in  its  character,  as  individual  prop- 
erty usually  is.  Railroad  property  extends  through  many  municipal- 
ities and  even  serves  communities  through  which  it  does  not  run.  It 
can  not  be  equitably  taxed  in  any  one  place  or  series  of  places. 

In  the  second  place,  it  is  comparatively  easy  to  locate  and  reach  the 
owners  of  individual  property,  who  usually  have  a  definite  residence, 
even  though  it  may  not  be  in  the  place  where  the  property  is  located, 
but  it  is  never  possible  to  find  or  identify  all  the  owners  of  the  more 
extensive  forms  of  corporate  property  in  a  corporation,  whose  capital  is 
represented  by  shares  of  stock  or  by  bonds.  The  actual  owners  may  be 
scattered  over  the  entire  country  or  even  the  entire  civilized  world,  and 
the  shares,  moreover,  are  so  frequently  transferred  that  it  is  scarcely 
possible  at  any  one  time  to  locate  the  owners  of  the  capital  stock  of  any 
of  these  large  concerns.  In  taxing  corporations  and  not  the  owners, 
who  obviously  can  not  be  found,  the  government  necessarily  makes  a 
departure  from  the  method  applied  to  individual  property. 

Again,  individual  property  stands  in  a  very  close  and  personal  rela- 
tion to  its  owner;  is  under  his  direct  control;  can  be  sold  freely  and 
completely,  so  that  its  market  value  is  comparatively  easy  to  ascertain. 
But  the  property  of  a  corporation  is  not  in  the  same  sense  under  the 
control  of  the  individual  shareholders  and  there  is  not,  properly  speak- 
ing, any  market  value  by  which  the  corporate  property  as  a  whole  can 
he  measured.  Only  the  market  value  of  the  shares  or  the  bonds  can  be 
ascertained,  and  these  are  often  affected  by  considerations  that  have  no 
direct  relations  to  the  value  of  the  property  they  represent, 

It  is  practically  impossible  to  get  at  the  personal  property  or  income 
of  private  individuals,  but  the  income  of  corporations,  especially  of  the 
Larger  corporations,  can  be  very  definitely  arrived  at.  It  lies  in  the 
very  nature  of  the  corporation,  and  of  the  rights  invested  in  the  stock- 
holder- and  bondholders,  that  these  earnings  should  be  very  carefully 

counted  for  and  recorded. 

Tim-,  while  individual  property  is  more  commonly  measured  by  its 
known  market  value  than  by  its  earning  capacity,  corporate  property, 
on  the  other  hand,  has  no  known  market  value,  strictly  speaking,  and 
i.~  measured  or  valued  more  often  by  its  earnings.  Our  examination 
above  of  the  great  "Michigan  Kailroad  Appraisal"  and  of  the  efforts 
made  by  the  Wisconsin  Tax  Commission  to  determine  the  value  of  rail- 
roads showed  distinctly  that   the  only  methods  of  arriving  at  the  value 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  155 

of  railroad  property  is  by  way  of  earnings.  A  horse  is  worth  what  he 
will  bring,  in  the  sense  of  what  he  will  sell  for  outright.  A  railroad  is 
worth  what  it  will  bring,  in  the  sense  of  what  annual  income  it  will 
yield.  The  United  States  Supreme  Court,  in  its  decision  relating  to  the 
taxation  of  interstate  commerce,  has  obviously  felt  this  distinction. 
The  judges  have  refused  to  permit  the  states  to  tax  the  earnings  from 
interstate  commerce  eo  nomine,  but  have  permitted  states  to  tax  the 
property  of  railroads  engaged  in  interstate  commerce  on  the  basis  of  a 
certain  percentage  of  the  gross  earnings,  including  earnings  in  interstate 
commerce.  While  this  is  apparently  "whipping  the  horse  around  the 
stump,*'  because  there  is  practically  no  difference  in  the  ultimate  result 
whether  the  tax  be  on  the  gross  earnings  as  such,  or  on  the  property  for 
the  same  amount  and  measured  by  the  gross  earnings,  yet  the  courts 
fully  realized  that  there  was  no  way  of  arriving  at  the  value  of  the 
property  in  the  case  of  a  railroad  which  did  not  take  into  consideration 
its  earnings. 

The  Ontario  Commission  on  Railway  Taxation,  which  rendered  a 
report  in  1905,  after  stating  the  distinctions  made  above  between  indi- 
vidual and  corporate  property,  sums  up  as  follows  : 

Since,  then,  it  is  impossible  to  equitably  tax  private  property  and  corporate 
property  on  the  same  basis,  there  is  no  necessary  injustice  or  inequality  in  taxing 
them  upon  different  principles  or  by  different  public  authorities.  In  fact,  it  is 
the  attempt  to  tax  them  both  upon  the  same  principle  which  works  injustice  and 
inequality,  and  it  is  only  by  taxing  them  upon  different  principles  suited  to  each 
form  of  property  that  it  is  possible  to  attain  or  approximate  justice  and  equality. 

3.  Taxation  based  on  earnings. 

The  last  of  the  three  systems ;  namely,  taxation  of  the  property  on  the 
basis  of  earnings,  has  the  marked  advantage  of  simplicity  and  ease  of 
administration  and  close  adjustment  to  the  ability  of  the  corporations 
to  pay. 

AVhile  the  earnings  tax  as  the  principal  tax  on  railroads  is  openly 
used  in  four  states  only,  it  is  actually  the  basis  of  the  system  in  others. 
Thus  in  Indiana,  whose  law  regarding  the  taxation  of  railroads  provides 
the  old-fashioned  property  tax,  the  practice  of  assessment  is  one  based 
on  earnings.  The  State  board  in  that  State  bases  its  assessment  of  the 
property  on  gross  earnings,  making  an  arbitrary  deduction  therefrom 
for  operating  expenses  and  capitalizing  the  net  amount  thus  obtained  to 
arrive  at  the  value  of  the  property.  Their  ordinary  rule  is  to  take  70' , 
of  the  gross  earnings  as  operating  expenses  and  capitalize  the  remaining 
30%.  The  same  thing  is  done  more  or  less  systematically  in  otherstates; 
that  is,  the  value  of  the  property  is  determined  by  the  earnings. 

On  theoretical  grounds  it  is  claimed  that  net  earnings  are  a  fairer 
basis  of  taxation  than  gross  earnings.  Professor  II.  C.  Adams*  who  is 
acknowledged    authority    on    taxation,    and    also    statistician  for  the 


156  REPORT   OF   COMMISSION   ON    REVENUE   AND   TAXATION. 

[nterstate  Commerce  Commission,  states  the  theoretical   argumenl   as 

follows : 

The  firsl  alternative  presented  to  1 1 1 « -  financier  liea  between  a  gross  or  Del  item 
:i-  the  basis  of  assessment,  if.  however,  one  confine  his  attention  to  purely  economic 
considerations  the  decision  is  not  difficult.  A  t;i.\  on  the  gross  earnings  of  a  corpo- 
ration can  QOl  1"'  satisfactory,  because  it  takes  no  account  of  operating  expenses 
incident  to  the  Becuring  of  BUCh  earnings.  In  the  railway  industry,  for  example, 
operating  expenses  average  865!  of  operating  earnings.  From  this  it  appears  that 
only  '.1  I  of  gross  earnings  from  operation  are  at  the  disposal  of  the  corporations 
for  the  payment  of  interest  on  debt,  taxes,  incidental  betterment-,  and  dividends. 
There  arc.  however,  railways  in  this  country  whose  oormal  operating  expenses  are 
col  more  than  509!  of  gross  earnings,  and  others  whose  operating  expenses  exceed 
75  of  gross  earnings.  It  is  evident,  therefore,  that  a  just  assessment  as  between 
corporations  must   take  into  account  expenses  as  well  as  earnings.* 

Analysis  of  income  account  of  a  railroad. 

In  order  to  make  this  quotation  clear,  it  should  be  stated  that  the  net 
earnings  referred  to  are  the  gross  earnings  less  operating  expenses. 

The  following  schedule,  taken  from  the  forms  and  reports  of  the  Inter- 
state Commerce  Commission,  will  show  what  is  meant: 

Gross  Earnings  from  Operation 

Less  Operating  Expenses - — 

(1)  [rooms  (ob  Deficit)  from  Operation... 

Dividends  on  Stocks  Owned   

Interest  on  Bonds  Owned - - --- 

M  iseellaneons  Income — less  Expenses - - -. - 

Incomk  from  Other  Sources - 

(2)  TOTAL  Income  (or  Deficit). -.- - 

Di.im  I  TIONB  from   1  NCOME  : 

interest  on  Funded  Debl  Accrued - - — 

interest  on   Interest-bearing  Current  Liabilities   Accrued,  not  Otherwise 

Provided   for - - 

Interest  on  Real  Estate  Mortgages - 

Rents  Paid  for  Lease  of  Road 

Taxes  - 

Permanent   Improvements 

Other  Deductions -  -- - 

Total  Deductions  fbom  [noomj ----- 

(8)  Net  Income  (ob  Deficit) - 

Dividends  per  cent  Common  Stock -        

Dividends.  percent  Preferred  Stock    

Other  Payments  from  Net  Income -- 

ill  Totai  Dividends  urn  other  Payments - 

Surplus  (or  Deficit)  from  Operations - 

The  items  in  this  schedule  are  each  elaborately  and  carefully  defined 
by  the  [nterstate  Commerce  Commission  in  a  set  of  rules  drawn  up 
with  the  aid  and  concurrence  of  the  Association  of  American  Railway 
Accounting  Officers,  and  in  a  series  of  "decisions"  which  have  been 
published  by  the  <  !ommiseion. 

*  Science  of  Finance,  p.    160. 


REPORT   OF    COMMISSION   ON   REVENUE    AND   TAXATION.  157 

The  choice  for  a  "  net"  item  as  a  basis  for  taxation  lies  between  the 
items  numbered  (1)  to  (4).  The  first  of  these  is  preferred  by  all 
authorities,  inasmuch  as  it  includes  all  income  which,  under  the 
hypothesis  that  all  other  corporations  are  taxed  in  the  same  manner, 
would  not  have  been  taxed  before.  Item  (2)  would  not  be  a  proper 
basis,  inasmuch  as  it  would  contain  items  on  which  other  corporations 
have  been  taxed.  Item  (3)  should  not  be  taken,  because  interest  on 
funded  indebtedness  is  regarded  as  in  itself  a  net  item  or  an  earning  so 
closely  analogous  to  dividends  that  for  purposes  of  taxation  it  may  be 
regarded  as  the  same.  Item  (4)  is  not  suitable  for  taxation,  because 
purely  arbitrary  and  fixed  by  the  policy  of  the  company  without  refer- 
ence to  any  fundamental  fact.  Item  (1)  is  the  main  fund  which  is 
available  for  use  by  the  directors  of  the  road.  It  is  assumed  that  under 
normal  conditions  they  will  try  to  make  this  as  large  as  possible,  by 
raising  the  gross  income  and  reducing  the  expenses  of  operation.  Out 
of  this  they  have  to  pay  all  the  expenses  of  supporting  the  property; 
out  of  this  taxes  must  be  paid. 

All  discussions  of  "taxation  of  net  earnings"  apply  to  this  item. 

Objections  to  net  earnings  tax. 

It  is  often  pointed  out  that  it  is  a  difficult  matter  to  determine  what 
the  net  earnings  are,  that  the  accounts  can  be  manipulated,  that  expen- 
ditures for  improvements  can  be  readily  carried  into  operating  expenses, 
that  the  very  meaning  of  the  term  is  ambiguous,  and  that  the  govern- 
ment has  no  assurance  that  it  is  getting  its  full  revenue.  To  enforce  a 
net  earnings  tax  would,  it  is  generally  admitted,  require  a  uniform 
system  of  accounting,  prescribed  by  government,  and  a  regular  and 
constant  inspection  by  public  officials  of  every  account  and  of  almost 
every  act  of.  the  railroad. 

The  enforcement  of  a  net  earnings  tax  would  furthermore  encounter 
a  large  number  of  special  difficulties  in  each  case,  an  adjustment  of 
which  seems  well-nigh  impossible.  For  example,  by  building  the  Lucin 
cut-off,  the  railroad  company  saved  a  considerable  sum  each  year  which 
formerly  was  accounted  an  "operating  expense."  As  an  "operating 
expense"  it  would  very  properly  be  deducted  from  the  gross  earnings  in 
determining  the  "net  earnings"  upon  which  a  tax  should  be  based. 
The  amount  -aved  by  the  cut-off  now  goes,  in  large  part  at  least,  to 
in.  et  the  interest  on  the  bonds  which  paid  for  the  construction  of  the 
cut-off.  It  has  ceased  to  be  an  "operating  expense,''  and  as  an  "interest 
charge"  can  not  be  deducted  from  the  gross  earnings  in  computing  the 
net  earnings  for  purposes  of  taxation.  Hence  the  railroad's  taxes  would 
be  increased  without  any  increase  in  it-  revenues  available  to  pay  them, 
or  any  real  saving  in  outlay.  There  arc  endless  varieties  of  the  same 
difficulty,  which  arises  with  every  new  improvement,  purchase  of  new 


158  U.l'ORT  OF    COMMISSION   ON    REVENUE   AND   TAXATION. 

rolling  sto.k.  readjustment  of  organization,  and  with  every  change  in 
financial  policy. 

v  ain,  when  great  railroad  systems  arc  built  up  of  many  parts  and 
branches  and  are  operated  as  a  whole,  under  various  forms  of  control, 
Leases,  part-ownership  of  stock,  etc.,  with  minor  or  subsidiary  roads, 
branches,  etc.,  and  an-  operated  in  various  Btates,  the  determination  of 
the  net  earnings  becomes  still  more  intricate  Contract  allowances  to 
subordinate  or  affiliated  roads  may  take  the  form  of  an  allowance  for 
operating  expenses  when  they  are  really  rentals  or  bonuses,  or  the 
reverse.  Take,  for  example,  the  payment  to  the  Pullman  Company  of 
mileage  on  its  cars  when  operated  over  the  Southern  Pacific.  This  Com- 
mission has  been  Informed  by  the  Pullman  Company  that  this  payment 
originated  as  a  commutation  of  the  expenses  of  repairs  which  the 
Southern  Pacific  was  originally  required  to  make  and,  it  is  claimed,  is 
not  a  rental  proper.  If  counted  as  an  operating  expense  it  could  be 
deducted,  but  if  it  be  a  rental  it  could  not  be  deducted  in  computing 
net  earnings  for  purpose  of  taxation. 

.Many  similar  special  problems  might  he  pointed  out.  The  com- 
plexities confronting  the  administration  of  the  net  earnings  tax  are  so 
numerous  as  to  present  practically  insuperable  obstacles  to  its  use. 

But  entirely  aside  from  these  practical  difficulties  in  the  way  of 
enforcing  the  net  earnings  tax,  there  is  a  serious  objection  to  it  in 
principle  which  makes  it  scarcely  worth  while  even  to  discuss  its  possible 
t  heoretical  advantages. 

Railroads  do  not  always  have  net  earnings,  they  do  have  gross  earnings 
and  they  do  have  extensive  possessions.  So  long  as  individuals  are 
required  to  pay  taxes  on  their  property  irrespective  of  whether  that 
property  yields  a  profit  or  not,  just  so  long  will  the  people  demand  that 
railroads,  with  miles  of  track,  rights  of  way.  rolling  stock  and  valuable 
franchises,  shall  pay  taxes  irrespective  of  whether  they  make  a  profit  or 
not.  Whatever  may  be  the  objections  to  taxation  apportioned  according 
to  property  — and  it  is  admitted  that  they  are  many  and  serious— yet  that 
LS  the  exisl  in'.:  American  ideal  for  taxation  in  cases  where  it  can  be  made 

to  work  at  all.  And  it  is  the  nil  [mate  measure  by  which  any  other  system 
will  he  tested.  If  we  ;nv  prepared  to  admit  that  a  railroad  should  be 
exempt  from  taxation  because  its  accounts  show  a  deficit,  we  must  admit 
that  a  farmer  should  he  exempt  when  his  crops  fail  ami  his  year's  work 
Bhows  a  loss.  To  most  American  voters  this  will  be  a  rcductio  ad 
absurd it  hi.     It   is  not  an  idea  thai   will  have  a  strong  following. 

Furthermore,  for  fiscal  reasons  the  net  earnings  lax.  involving,  as  it 
does,  the  possibility  of  a  complete  or  partial  failure  of  revenue,  can  not 
be  seriously  considered.  The  government  must  continue;  property, 
including  railroad  property,  must  be  protected.    The  government's  very 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  159 

existence  would  be  jeopardized  if  its  revenues  could  be  cut  off,  or 
materially  reduced,  by  the  failure  of  a  large  corporation  to  so  manage 
its  business  as  to  make  a  profit. 

If  earnings  are  to  be  used  as  a  basis  of  taxation,  it  must  be  grosa 
earnings. 

Advantages  of  gross  earnings  tax. 

The  considerations  which  have  led  some  able  authorities  to  favor  ne1 
earnings  rather  than  gross  as  a  basis  of  taxation  can  be  given  due 
weight  in  fixing  the  rates  on  different  classes  of  corporations  or  by 
graduating  the  rates.  This  whole  matter  will  be  considered  in  another 
connection.  Here,  however,  it  must  be  pointed  out  that  a  high  percentage 
of  operating  expenses  to  operating  income  is  not  a  general  indication 
cf  inability  to  pay  taxes.  The  richer  and  more  prosperous  roads  often 
have  a  very  high  percentage  of  operating  expenses  to  income  from 
operation.  A  reduction  of  rates  may  actually  increase  at  one  and  the 
same  time  the  proportion  of  expense  to  income  and  the  aggregate  of 
net  income. 

Railroad  officials,  as  a  rule,  are  strongly  in  favor  of  the  gross 
earnings  tax.  Their  chief  reasons  are  its  simplicity,  the  ease  of  admin- 
istration, and,  above  all,  the  fact  that  it  always  enters  in  the  same  pro- 
portion into  their  accounts,  so  that  its  effect  upon  their  business  is 
always  uniform.  It  is  natural  for  railroad  officials  to  look  upon  taxes 
as  an  expense  incident  to  business  done.  If  a  road  does  more  business 
this  year  than  last,  it  buys  more  coal,  pays  more  wages,  and,  under  this 
plan,  would  pay  more  taxes.  Entering  in  this  manner  into  their 
accounts,  it  is  not  a  disturbing  nor  an  arbitrary  entry  requiring  explana- 
tions, as  would  an  increase  in  taxation  in  face  of  a  decrease  in  business. 
Furthermore,  the  tax  varies  from  year  to  year  in  direct  proportion  to 
the  fund  out  of  which  it  must  be  paid.  The  tax  is,  therefore,  always 
in  proportion  to  the  road's  ability  to  pay. 

That  the  railroads  themselves  favor  this  plan  is  no  evidence  that  it 
is  one  adverse  to  the  public  interest.  Simplicity,  ease,  and  cheapness 
of  administration,  and  certainty  of  returns,  are  advantages  to  the 
government  as' well  as  to  the  taxpayer.  Steadiness  of  growth  in  revenue 
is  another  advantage.  The  revenue  derived  from  a  gross  earnings 
tax  will  grow  with  the  growth  of  the  community,  and  Avill  in  the 
long  run  ]<<'«■[>  pace  therewith.  In  this  respect  it  affords  a  decided 
pdvantage  over  the  property  tax.  The  assessment  of  property  tends  to 
become  stationary  or  to  advance  at  a  constantly  decreasing  rate.  Only 
some  radical  change  in  the  law  or  in  the  administration  thereof  can 
counteract  this  tendency. 


160  REPORT  OF   COMMISSION   ON   REVENUE  AND   TAXATION. 

Tendency  of  property  tax   to   become  stationary  and  of  gross 
earnings  tax  to  advance  in  yield. 

There  is  a  marked  crystallization  to  be  noted  in  the  assessment  of 
property  for  purposes  of  taxation.  An  assessment  once  made  on  a 
given  parcel  of  property  is  usually  regarded  as  more  or  less  final,  and 
is  changed  only  as  additions  are  made  in  the  way  of  new  property  or 
new  construction.  This  is  universally  true,  except  in  rapidly  growing 
communities,  where  attention  is  constantly  directed  to  the  changing 
values.  It  is  particularly  true  of  railroad  property.  A  board  of 
assessors  having  once  fixed  the  value  is  prone  to  consider  that  as  very 
nearly  final,  and  to  increase  it  only  at  long  intervals  or  as  new  lines  are 
built  or  new  equipment  added.  Unless  there  is  some  radical  change  in 
the  law  or  in  the  administration,  the  valuation  made  in  one  year  is  the 
chief  consideration  in  lixing  the  value  the  next  year. 

This  tendency  of  a  property  tax  to  become  stationary  or  to  advance 
more  and  more  tardily  each  year  is  strikingly  illustrated  in  the  history 
of  California  taxation.  From  1855  to  1870  the  assessment  roll  advanced 
each  year  at  an  average  rate  of  about  10%  per  annum.  In  one  year, 
after  the  adoption  of  the  codes,  it  jumped  over  150%.  showing  clearly 
how  it  had  lagged  before.  It  then  fell  back,  and  for  the  next  decade 
advanced  but  about  5%  per  annum.  The  adoption  of  the  new  Constitu- 
tion, which  worked  an  extensive  revision  of  the  revenue  laws,  caused 
some  improvement,  but  the  advance  was  not  over  an  average  of  109? 
per  annum  for  the  next  decade.  From  1890  on  it  remained  nearly 
stationary  for  a  decade,  the  annual  fluctuations,  while  large  in  absolute 
sums,  being  small  percentages  of  the  whole  roll.  Since  1890  there  has 
hem  a  slight  improvement,  but  trend  is  still  below  a  10%  increase  per 
annum.  Meanwhile  the  assessment  roll  has  been  outstripped  by  the 
growth  in  population  and  in  material  well-being. 

The  contrast  between  the  growth  of  a  gross  earnings  tax  and  that  of  a 
property  tax  is  strikingly  shown  in  the  case  of  Illinois.  In  that  State 
one  -rent  railway  system,  the  Illinois  Central,  is  taxed  on  gross  earnings, 
■ill  others  <m  property.  The  taxes  on  the  Illinois  Central  increased  from 
1894  to  1904  by  49%.  The  assessment  of  all  other  roads. increased  hot 
26%,  and  was  practically  stationary  for  the  three  years  1902,  1903, 

,nd    1904. 
Comparison  of  Rates  of  Increase  of  Gross  Earnings  Tax  and  of  Property  Tax  In  Illinois. 


1 
1901  'J 

l.... 

I  >cr;idc 


l  ncrease  Per  Cent 

All   Other    Rail- 

Increase  Percent 

nilnois  Central 

Over  Preced- 

roads. 

Ovi-r  r 

Taxes. 

ing  Vriu  ■-. 

Assisscl  Value. 

.line  Figures. 

-    733,304 

634 

4,726,882 

996,579 

124% 

1,662,110 

decrease 

L,085,430 

9% 

4,726,267 

H% 

49% 

26 

REPORT   OF    COMMISSION    ON    REVENl'E    AND    TAXATION. 


161 


Growth  of  gross  earnings  tax  in  Minnesota. 

The  steadiness  of  growth  in  the  case  of  the  gross  earnings  tax  is  very 
well  illustrated  by  the  result  of  the  tax  on  railroads  in  Minnesota. 
This  tax  lias  been  in  use  in  that  State  since  1865.  In  the  forty  years 
the  revenue  from  this  tax  has  grown  from  $4,550.14  to  over  $2,000,000. 
Only  nine  times  has  the  return  in  any  one  year  been  less  than  that  of 
the  preceding  year.  Only  once  in  all  that  time  did  the  revenue,  having 
fallen  back  one  year,  fail  to  make  more  than  good  again  the  next  year 
that  was  at  the  time  of  the  great  depression  of  1894.  The  fall  at  that 
time  was  20%,  and  it  took  two  years  to  make  good  again. 

The  following  table  and  chart  show  the  progress  of  this  tax  : 


Taxes  Paid  by 
Year.  Railroads. 

1866.... $4,078  21 

1875 106,873  11 

1877 135,840  92 

1886 591,333  57 

1889 685,433  02 


Taxes  Paid  by 
Year.  Railroads. 

1894 $817,633  39 

1897. - ...1,025,019  53 

1901 1,439,349  24 

1904 1,974,070  19 


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162  REPORT   OF   COMMISSION  ON   REVENUE   AND   TAXATION. 

Growth  of  gross  earnings  tax  in  Wisconsin. 

We  have  been  unable  to  obtain  a  table  Bhowing  the  returns  of  the 
gross  earnings  tax  in  Wisconsin  for  a  longer  period  than  from  L882  to 
190").     This  table  covers  two  periods  of  industrial  depression,  yet  as 

given  below,  it  shows  the  same  eharisteristic  of  steady  growth  shown  by 
tli.'  table  and  chart  for  Minnesota.  If  anything,  the  Wisconsin  experi- 
ence is  even  more  Bteady  than  that  of  Minnesota.  The  tax  trebled  in 
the  twenty-four  years.  Only  four  times  did  it  retrograde  and  then  only 
by  small  amounts. 

Year.  Taxes.  Your.  Tuxes.  Year.  Taxes. 

L8S2        $586,328  L890 $1,008,559           18«J8 $1,247,857 

683,082  L891 1,140,048           189!) 1,360,120 

L884 758,269  1892 1,220,674     1900 1.547.141 

L885 733,195  1893- 1,156,260     1901 1,600,379 

L886 747,870  1894 1,438,758     1902 1,711,900 

1887 --..  763,994  L895 1,175,752     1903 1,795,285 

1888.... 1,068,632  L898 1,172,793     1904 1,948,340 

L889 947,772  1897 1,265,094            1905 1.912.410 


The  ad  valorem  tax  in  Michigan  and  Wisconsin. 

That  the  property  tax  has  recently  shown  up  so  strongly  in  Michigan 
and  Wisconsin  is  no  evidence  of  a  real  advantage  possessed  by  that 
tax.  The  change  from  the  gross  earnings  tax  to  the  property  tax  in 
these  states  resulted  from  an  openly  declared  attempt  to  make  the  rail- 
roads pay  more  taxes.  "A  new  broom  sweeps  clean,"  and  for  a  few 
years  it  may  be  expected  that  the  administration  of  the  property  tax 
on  railroads  in  these  states  will  be  strong  and  vigorous.  But  unless 
the  experience  of  these  states  proves  to  be  the  opposite  of  that  of  all 
other  states  for  over  half  a  century,  the  administration  will  weaken 
and  the  assessed  valuation  gradually  rigidify.  This  tendency  is  already 
apparent  in  the  Michigan  assessment  of  railroads,  w  hiehMecreased  from 
$222,106,000  in  1903  to  $196,795,000  in  1904. 


REPORT   OP   COMMISSION   ON   REVENUE   AND   TAXATION. 


163 


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Growth  of  the  Cross  f?ece/pts  Tax 

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If,  I  REPOBT   OF   COM  MISSION    ON    REVENUE  AND   TAXATION. 

Gross  earnings  are  definite  facts. 

To  determine  the  value  of  a  piece  of  property  requires  judgment,  and 
opinions  thereon  may  differ.  Bui  the  gross  earnings  of  a  railroad  con- 
stitute a  definite  fact;  their  Bum  does  not  vary  with  differences  of  opinion. 

The  slow  rate  of  advance  already  referred  t<»  ae  characteristic  of  a  prop- 
erty tax  i-  recognizable  in  the  State  Board  of  Equalization's  a ment 

of  railroads  in  California.  That  assessment  was  $50,746,500  in  ls84, 
sank  steadily  to  $•  10.19s,652  in  1890,  rose  by  slow  degrees  to  $49,121,- 
485  in  1901,  and  then  to  $64,812,603  in  1902,  and  $69,820,1*1;  in  1905. 
A  gross  earnings  tax  would  have  shown  much  greater  advance. 

The  objection  is  sometimes  raised  against  a  gross  earnings  tax  that  it 
would  fluctuate  violently  from  year  to  year  and  that  these  fluctuations 
would  not  coincide  with  the  needs  of  the  government.  It  lias  been 
pointed  out  that  the  needs  of  the  government  are  as  great  in  years  of 
industrial  depression  as  at  any  other  time  and  that  in  those  years  the 
gross  earnings  fall  off  and  hence  the  revenue  would  decline. 

It  is  an  almost  complete  answer  to  this  argument  to  point  out  that 
in  years  of  depression  when  the  resources  of  all  the  people  are  lessened, 
and  all  are  forced  to  economize,  it  would  be  a  fitting  thin-  and  a  wise 
policy  for  the  government  also  to  reduce  its  expenditures. 

But  as  a  matter  of  fact  the  gross  earnings  tax  will  show  a  very  high 
degree  of  steadiness  as  well  as  showing  a  more  rapid  rate  of  growth,  in 
the  long  run,  than  is  usually  shown  by  the  property  tax.  The  decrease 
in  dull  years  is  not  large  as  compared  with  the  increase  in  good  year-. 

The  following  table  shows  the  fluctuations  in  the  gross  earnings  of 
all  railroads  in  the  United  States  for  a  period  long  enough  to  cover  good 
years  and  had  years. 

For  every  $100  of  gross  earnings  in  1894  the  railroads  earned  in  the 

years  named  the  amount  set  opposite  the  year: 

1889  ---$103  L895 *  99  L900. - $126 

L890  -  110  L886 103  L901 133 

,-,l  ill  1897- 100  1902. -..141 


$103 

L896 

110 

IS!  Hi 

111 

L897 

118 

IS!  is 

lis 

1899 

.   100 

.  118  lsi.s  111  L903. 151 

1893.  lis  is;.!. -..   L15  L904  152 

IV. I 

The  greatest  fluctuation  in  any  one  year  was  1S%. 

The  above  figures  are  for  the  whole  United  States.     Hut  a  comparison 

0f   the  grOSE    earnings  Of   railroads   on  the    Pacific    Slope,  with  the  taxes 

paid   i,,   California   under  the  property  tax,  shows  jusl   as  clearly  the 

relative  merit-  of  the  two  plain,  so  far  as  steadiness  and  growth  are 
concerned.  In  the  following  table  the  first  column  shows  figures  pro- 
portional to  the  tax.-  actually  paid  by  railroads  in  California:  the 
second,  figures  proportional  to  those  which  would  have  been  paid  under 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 


165 


the  gross  earnings  tax.  The  basis  of  comparison  is  1894,  a  year  just  at 
the  beginning  of  the  last  depression;  1890  was  the  bottom  of  the 
"hard  times"  for  California.  It  will  be  seen:  first,  that  the  property 
tax  fluctuates  more  violently  and  rises  Less  in  the  decade  than  would 
the  gross  earnings  tax;  and,  secondly,  that  although  the  gross  earnings 
tax  falls  off  a  little  in  hard  times,  it  more  than  makes  good  in  the 
long  run: 

Table   Showing  the   Fluctuations  in  the   Taxes  Paid   Each  Year  by  Railroads  on   the 

Pacific  Slope  and   also   How  They  Would   Have    Fluctuated   Had   They  Been   Based 

on  Gross  Earnings. 

Had  taxes  been  based 
For  every  $100  paid  in        on    gross    earnings, 
1894  the  roads  actu-        for  every  $100  paid  in 
ally  paid  in  succeed-       1894  the  roads  would 
ing  years.  have    paid    in    suc- 

ceeding years. 

1894 $100  00  $100  00 

1895. 104  30  98  40 

1896 --  128  20  97  40 

•1897  105  60  97  20 

1898 118  00  119  50 

1899 - 107  60  123  90 

1900 124  50  140  50 

1901. 120  60  154  00 

1902  125  00  168  20 

1903 153  40  177  50 

1904 169  00  182  80 

Growth  for  decade 69.0%  82.8% 

Greatest  decrease  in  one  year $22  60  $1  60 

The  foregoing  table  is  based  on  the  reports  of  the  Interstate  Com- 
merce Commission.  Since  1896  the  California  intercounty  railroads 
have  reported  their  gross  earnings  to  the  State  Board  of  Equaliza- 
tion. These  figures  are  given  below.  It  will  be  seen  that  they  agree 
substantially  with  those  given  above,  and  that  for  the  period  under 
consideration  the  taxes  actually  paid  increased  only  67%,  as  against 
105%  which  they  would  have  increased  had  railroads  been  taxed  on 
gross  earnings. 


166 


ORT    OE    COMMISSION    <>\    REVEN1   I      \M»    TAXATION. 


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REPORT    OF    COMMISSION    ON    REVENUE    AND    TAXATION. 


167 


Had  the  State  used  a  4%  gross  earnings  tax,  the  revenues  would  have 
compared  with  the  taxes  actually  paid,  as  shown  in  the  following: 

Comparison  of  Taxes  Paid  by  California  Railroads  Operating  in  more  than  One  County, 
with  an  Assumed  Tax  of  4     on  Gross  Earnings. 


Year. 


Taxes  Paid, 
Present  Sys- 
tem. 


Percentage 

of  Amount 

in  Each 
Year  to  the 

Amount 
in  1896. 


AsMlIIK'll 

Tax  of  i  per 

cent  on 

Gross 

Earnings. 


1896 

1897 

1898 

L899 

1900 

1901 

1902 

1903 

1904.... 

1905 

Total  for  decade 


J780.264 
650,683 
758,394 
717,864 

846,082 

837.117 

884,062 

1,115,917 

1,350,963 

1,303,208 


100.0 
83.3 
97.2 
91.9 

108.4 
107.3 
113.3 
142.9 

173.0 
167.0 


$9,244,584 


$998,635 
951.347 
1,040,589 
1.175,131 
1,202,851 
1,412,559 
1,601,139 
1,758,490 
1,978,623 
2,042,908 


Percentage 

of  Amount 

in  Each 

Year  to  the 

Amount 
in  1896. 


loo.u 

95.3 

L04.0 

118.0 
120.0 
14o.o 

160.0 
176.0 
198.0 
205.0 


$14,162,272 


As  compared  with  the  steady  growth  of  the  gross  earnings  tax,  the 
fluctuations  of  the  property  tax  seem  strikingly  arbitrary  and  irrational. 

The  same  thing  is  shown  by  the  reports  of  other  states.  The  yield 
of  the  gross  earnings  tax  on  the  Illinois  Central,  as  reported  by  the 
Auditor  of  Illinois  in  his  report  for  1904  and  covering  the  years  from 
1855  to  1904,  shows  the  same  characteristic.  In  1870  this  tax  yielded 
.$469,809,  the  highest  up  to  that  time;  at  the  bottom  of  the  depression 
of  1873  the  yield  was  .+'400,741:  in  1884,  another  very  bad  year,  it 
yielded  $379,708;  in  1895,  which  is  the  lowest  point  in  the  next  depres- 
sion, its  yield  was  $573,452,  a  drop  of  over  $100,000  from  the  year 
before,  which  had  been  much  higher  than  any  preceding  year.  From 
that  year  the  climb  is  steady  and  rapid  to  over  $1,000,000  in  1904. 
The  gross  earnings  of  a  single  road  in  a  State,  even  if  a  large  one,  may 
be  expected  to  fluctuate  more  violently  than  those  of  all  roads  in  a 
State,  and  the  steady  growth  shown  in  the  returns  of  the  tax  on  the 
Illinois  Central,  even  when  we  pick  out  the  worst  years  for  comparison, 
is  all  the  more  remarkable. 

It  is  generally  assumed  that  the  strongest  objection  to  the  gross  earn- 
ings tax  is  that  it  would  not  be  equitable  as  between  different  roads. 
The  implication  is  that  the  roads  with  high  percentages  of  net  earnings 
are  better  able  to  pay  high  taxes  than  the  others.  This  is  far  from 
being  the  case.  The  road  with  a  low  percentage  of  net  earnings  may  be 
the  largest  traffic-carrier  and  biggest  dividend-payer.  Again,  as  shown 
above,  this  ratio  may  be  materially  altered  by  changes  in  equipment, 
which  have  the  effect  of  capitalizing  certain  elements  of  cost.  The 
assumption  that  the  justice  of  a  gross  earnings  tax  as  between  different 
roads  can  best  be  tested  by  a  comparison  of  the  taxes  so  imposed  with 


168  i;i  I'ORT  OK   COMMISSION    ON    REVEN1  E   AND   TAXATION. 

the  ne1  earnings  rests  upon  the  prior  assumption  thai  ne1  earnings 
form  the  better  basis,  which  is  the  very  point  at  issue.  It  assumes  a 
differenl  standard  of  taxation;  aamely,  income,  for  testing  equality 
from  thai  usually  applied  by  the  American  people;  namely,  property. 

Small  as  may  have  been  the  real  Logical  value  of  the  catchword  of  the 
reform  movements  id  Michigan,  Wisconsin,  and  New  Jersey;  aamely, 
"equal  taxation";  nevertheless  it  appealed  to  popular  prejudices  and 
convictions  and  carried  three  series  of  hot-fought  political  campaigns. 
The  only  vestige  of  real  meaning  it  had  was  thai  railroads  should  pay 
the  sarin  amount  in  proportion  to  their  property,  by  whatever  method 
the  taxes  mighl  be  determined,  as  other  property  holders  paid.  The 
onlv  standard  of  comparison  that  the  American  voter  has  is  equality  in 
proportion  to  property.  It  is  therefore  useless  to  try  to  set  up  an  in- 
come basis  among  a  people  not  familiar  with  the  taxation  of  incomes. 
It  may  be  admitted  that  net  income,  if  it  could  be  discovered,  or  if  we 
could  define  it  satisfactorily,  might  he  a  hotter  basis,  but  such  a  basis 
is  not  generally  understood  and  it  is  as  useless  to  offer  it  as  a  standard 
in  the  United  States  as  it  would  be  to  argue  that  pounds,  shillings,  and 
pence  constitute  a  better  monetary  system  than  dollars  and  cents. 

It  is  interesting  to  note  that  the  Ontario  Commission  tried  the  test  of 
relative  proportions  of  net  to  gross  earnings  on  all  the  railroads  in  that 
province  in  a  most  elaborate  and  careful  manner,  and  that,  in  spite  of 
the  fact  that  the  percentages  varied  from  49%  to  98%,  nevertheless 
reached  the-  conclusion  that:  "When  we  consider  the  practical  in- 
equalities of  taxation  which  are  inevitable  under  every  known  system, 
it  is  quite  evident  that  for  nine  out  of  the  fourteen  roads  here  repre- 
sented, no  substantial  inequality  would  result,  whether  they  were  taxed 
on  their  gross  or  net  receipts."  They  further  found  thai  in  the  c;ise  of 
tli<- other  live  roads  when  the  returns  were  more  carefully  examined, 
"they  present  no  real  difficulties." 

As  a  matter  of  fact,  the  best  test  of  a  railroad's  prosperity  is  the 
amount  of  traffic  it  can  secure.  This  it  is  that  determines  the  amount 
of  property  it  can  safely  use,  and  ultimately  determines  its  net  earnings. 
Tie-  real  significance  of  the  net  earnings  is  found  not  by  comparing  it  with 
gross  earnings,  bul  with  the  investment.  A  "nimble  penny"  or  a  "quick 
turnover"  make-  the  merchant  rich,  and  a  large  traffic  in  proportion  to 
cosl  of  roadbed,  right  of  way,  and  equipment,  makes  a  railroad  rich. 
A  country  butcher  Btarves  on-20%  profits,  and  a  city  butcher  may  wax 
fat  on  5      profits.      The  whole  thing  turns  on  gross  sales. 

Proportion  between  net  and  gross  earnings  of  railroads. 

The  Btatemenl  is  sometimes  made  that  "a  gross  earnings  tax  on  rail- 
roads is  contrary  to  public  policy,  because  nei  earnings  increase  faster 
than  gross  earnings."     This  statement  is  based  on  the  trite  observation 


REPORT   OF   COMMISSION    ON   REVENUE   AND   TAXATION.  169 

that  a  large  part  of  a  railroad's  expenses  are  "fixed  expenses"  and  do 
not  vary  with  the  amount  of  business  done.  This  has  been  most  force- 
fully stated  by  Mr.  Acworth,  an  English  railroad  authority. 

In  a  hundred  units  the  traffic  costs  the  company  100  shillings  for  interest  and  expenses. 
It  is  probably  a  fair  estimate  to  say  that  1,000  units  will  cost,  not  1,000,  but  325  shillings. 
The  figures  are  arrived  at  as  follows:  Interest  on  capital  remains  invariable;  this,  as 
we  have  seen,  represents  one  half  the  total  cost.  Of  the  working  expenses  fully  one 
half,  according  to  estimates  made  by  experts  in  different  countries,  which  largely 
agree,  remain  constant.  The  remaining  half  is  taken  to  increase  proportionately  to  the 
increase  of  traffic.  The  old  expenditure  for  the  100  units  was,  then,  50  plus  25  plus  25; 
the  new  expenditure  is  50  plus  25  plus  250,  equals  325  shillings. 

There  can  be  no  doubt  of  the  general  accuracy  of  this  analysis,  and 
if  rates  rem" in   the  same  and  the  investment  remains  the  same  the  net 
earnings  will   increase  faster  than  gross  earnings.     But,  nevertheless, 
under  the  constantly  varying  conditions  of  American  railway  trans- 
portation the  value  of  this  formula  for  determining  the  proper  basis  of 
taxation  has  not  heen   demonstrated.     As  an  argument  in  favor  of  a  net 
earnings  tax  as  against  a  gross  earnings  tax  it  fails  because  it  overlooks 
at  least  one  very  important  factor.     That  is,  that  the  rates  have  been 
reduced,  the  investment  increased  and  the  proportion  of  expenses  has 
been  increased.     The  proportion   to  gross  earnings  of  those  particular 
net  earnings  that  hare  always  heen  selected  as  the  appropriate  items  for 
taxation,  if  taxation  is  to  be  based  on  net  earnings,  has  not  in  the  United 
States  as  a  whole  varied   two  ])oints  either  above  or  below  the  average 
(  wh  ich  is  33.6%),  during  the  past  fifteen  years.     And  this  has  occurred  in 
spite  of  the  fact  that   the   gross  earnings   have  increased  in   the  last 
decade  from  $6,050  to  $9,306  per  mile  of  road,  an  increase  of  50%.  That 
is,  net  earnings  are,  as  a  matter  of  fact,  nearly  proportional  to  gross 
earnings  and  keep  the  same  proportion  year  after  year,  even  though 
the  operating  expenses  per   unit  of  business    may    decrease.      During 
those  fifteen  years,  at  least,  a  government  using  a  gross  earnings  tax 
would  have  come  off  just  as  well  in  matter  of  revenues  as  one  using  a 
net  earnings  tax. 

The  argument,  therefore,  that,  because  the  cost  per  unit  of  traffic  must 
have  decreased,  therefore  the  relative  net  earnings  per  unit  or  per  mile 
of  line  must  have  increased,  is  not  sustained.  As  stated  above,  the  net 
earnings  of  all  railroads  in  the  United  States  have  not  changed  in  their 
proportion  to  the  gross  earnings.  This  is  accounted  for  by  the  fact  that 
in  order  to  get  the  increased  traffic  the  mads  have  been  obliged  to  reduce 
their  rates  and  increase  their  expenses,  and  the  933,674  units  of  traffic 
brought  in,  not  $10,300  gross,  the  amount  that  would  have  been  receivr.l 
had  the  roads  carried  the  new  traffic  at  the  same  rates  as  the  "Id,  but 
only  $9,306,  and  cost  to  carry  not  $5,804,  as  called  for  in  theory,  but 
$6,308;  so  the  net  earnings  have  not  increased  more  rapidly  than  the 
gross  en  minus  with  the  increase  in  traffic. 


L70 


REPORT    OF    COMMISSION    ON    SEVEN!  E    \M>   TAXATION. 


From  a  further  examination  of  the  returns  made  by  the  railroads  to 
the  [nterstate  Commerce  Commission  for  the  past  fifteen  years  it  is 
obvious  that  it  would  not  have  made  any  substantial  difference,  either 
to  tli"  roads  or  to  the  government,  whether  the  tax  were  based  on  the 
gross  earnings  at, Bay,  I  , or  on  oe1  earnings  at.  say,  12  or  15%.  For 
the  genera]  run  of  railroads  throughout  the  country,  or  in  any  one 
of  the  ten  groups  into  which  the  Interstate  Commerce  Commission 
divides  the  country,  the  proportions  are  so  nearly  stable  that  no  sub- 
stantial difference  would  result  from  either  method.  It  follows,  there- 
fore, that  the  simpler  method  is  to  be  preferred,  and  that  is  to  base  the 
tax  on  the  gross  earnings. 

Furthermore,  a-  suggested  in  the  preceding  paragraph,  a  net  earnings 

tax,  to  be  just  to  the  government,  would  have  to  he  so  high,  15%  to  20%, 
as  to  place  a  very  high  premium  on  false  returns. 

The  question  of  the  equity  of  the  gross  earnings  tax  a-  between  dif- 
ferent road-  can  be  tested  somewhat  roughly  by  comparing  the  tax- 
now  paid  on  the  ad  valorem  plan  with  the  taxes  that  would  he  paid  on 
the  gross  earnings  plan.  This  is  done  in  the  following  table  for  the 
more  important  railroad  systems  of  the  State.  It  is  not  argued  that  the 
present  system  is  equitable  as  between  the  different  roads,  but  it  affords 
the  easiest  and  most  readily  available  basis  of  comparison. 


Name  of  Road. 


lux  on 
Property, 

Presmt 

System. 

L904. 


Per  Cent 

of  all 
Taxes  on 

Railroads 


Tax  onOross 
Earnings 

at4Per  I  lenl 
Proposed 
SyMeni. 


Per  Cent 

oi   nil 
Ta.xe>  "ii 
Railroads. 


Column  :; 
Reduced  to 

Same  Total  as 
Column  1 


and 


Southern  Pacific  System 
Santa  I'V'  System 

California  '  Northwestern 
North  Shore 

Nevada-California-Oregon   and 
sierra  Valleys 

Salt  Lake  Road 

"ia  County  Narrow-Gauge. 

Pacific  Coast 

Pajaro  Valley  Consolidated... 

Sierra  Mail  way 

Boca  and  Loyalton 

Lake  Tahoe. --- 


Totals. 


J1.349.42S 

306,372 

62,612 

4,666 
27,237 

3,397 

t ;,!)-)!  i 

2.SS1 

8,424 
5,501 
L.700 


75.85 
17.22 

3.52 

.262 

1.530 

.191 

.391 
.161 
.472 
.308 
.096 


$1,508,958 
375,109 

82,027 

7,661 
24,423 
5,125 
5,806 
2,635 
14,657 
6,936 
L.265 


74.17      11,319,484  :«J 
L8.44  328,047  60 


»|1,779,174 


100.00 


$2,0:34,502 


4.03 

.37 
L205 

.252 
.286 
.124 
.721 
.34] 
.062 


1I.O.OO 


71,693  70 

6,582  30 

21,436  96 

4.483  (>8 

5,070  15 

2,205  96 

12,826  59 

6,066  39 

1,102  ms 


$1,779,000  oo 


In  the  case  of  the  larger  roads  the  change  of  system  would  not  mate- 
rially alter  their  proportion  of  the  total  taxes  on  railroads.  But  in 
the  case  of  some  of  the  smaller  roads  the  changes  would  be  quite 
important.  In  the  case  of  the  California  Northwestern  and  North  Shore, 
it  means  an  increase  of  one  seventh  in  its  proportion  of  taxes.  This  is 
probably  due  to  the  ferry  traffic  connected  with  this  road,  which  make 
its  earnings  high  compared  to  the  property  used.  In  the  case  of  the 
Nevada-California-Oregon  and    Sierra  Valleys    Railroad,   the  increase 


♦Includes  State,  county,  city,  and  district  taxes. 


REPORT   OP    COMMISSION    ON   REVENUE   AND   TAXATION.  171 

is   quite  large,   and   in    the  case  of  the   Sierra   Railway   is    nearly  5%. 
These  are  relatively  very  profitable  roads.     But  returns  for  later  years 

show  less  increase. 


Definitions  of  gross  earnings. 

There  are,  as  has  already  been  pointed  out,  two  way 3  of  defining  the 
"  gross  earnings  within  the  State  "  of  interstate  railroad  systems,  whieh 
may  be  used  in  computing  the  tax  on  the  property  and  franchises. 

The  Maine  definition. 

The  first  is  like  that  of  Maine,  which  defines  the  "  gross  earnings 
within  the  State  "  of  a  railroad  operating  both  within  and  without  the 
State  as  that  proportion  of  the  entire  earnings  which  the  mileage  in  the 
State  is  of  the  total  mileage. 

The  Minnesota  definition. 

The  second  is  like  that  of  Minnesota,  which,  in  case  of  a  railroad 
operated  both  within  and  without  the  State,  requires  a  report  of  all 
earnings  from  business  beginning  in  and  terminating  in  the  State,  and 
also  of  that  proportion  of  the  earnings  from  interstate  business  which 
the  mileage  each  item  of  such  traffic  was  carried  within  the  State  bears 
to  the  total  mileage  such  item  was  carried. 

The  following  explanation  of  the  Minnesota  plan  was  given  to  the 
Ontario  Commission  by  Mr.  Staples,  one  of  the  three  members  of  the 
Railroad  and  Warehouse  Commission,  upon  which  devolves  the  duty 
of  obtaining  and  verifying  the  reports  of  the  gross  earnings  of  the  rail- 
road companies: 

In  Minnesota  we  take  every  shipment  by  itself  over  each  line,  no  matter  where  it 
originates;  if  it  goes  into  Minnesota  or  through  Minnesota,  even  if  only  one  mile,  the 
tax  is  the  proportion  of  that  one  mile  to  the  total  mileage  of  the  shipment.  Take  as 
illustration  a  shipment  over  180  miles  of  road,  of  which  7  miles  is  in  Minnesota;  the 
assessment  would  be  seven  one  hundred  and  eightieths  of  the  total  charges.  In  its 
report  the  railway  must  show  the  entire  gross  earnings  of  the  entire  system,  but  of 
course  if  a  shipment  originated  in  Winnipeg  and  went  down,  say  100  miles,  not  touch- 
ing Minnesota,  we  have  nothing  to  do  with  that  for  taxation  purposes.  We  only  assess 
those  shipments  in  which  we  are  interested,  that  is,  those  shipments  which  touch 
Minnesota. 


Discussion  of  these  definitions. 

The  relative  advantages  of  the  two  systems  turn  entirely  on  the 
situation  of  the  State  which  applies  them  and  the  character  of  the  rail- 
road business  done  within  its  boundaries.  The  difference  between  the 
two  methods  may  be  simply,  although  very  crudely,  illustrated  by  an 
imaginary  railroad   traversing  two  states  only.     In  one   State,  which 


1  ~-  REPORT    OF    COMMISSION    ON    REVENUE    AND    TAXATION. 

we  will  rail  A,  the  road  does  a  large  local  traffic  of,  say*  $10,000,000 
per  annum;  in  the  other  State,  B,  it  hae  a  -mall  local  traffic,  say 
12,000,000  per  annum.  Tin-  interstate  traffic  we  will  assume,  for  the  sake 
<>f  simplicity,  run-  mainly  to  ami  from  a  metropolis  on  the  extreme  border 
of  A  clear  across  A  and  B  to  and  from  a  city  on  tin-  farther  boundary 
of  B.  Tin-  mileage  in  A  i-  .".DO,  in  B  is  400.  The  total  through  traffic 
is  $1. ").()( io.OOO.  My  the  Maine  plan,  State  A  would  tax  five  ninths  of 
.$27.1  iiki.i i( to.  or  +1  .',,000,000.  My  the  .Minnesota  plan  it  would  tax 
$10,000,000,  the  intra-state  traffic,  plus  five  ninths  of  *  1 5,000,000,  or 
about  $8,333,000,  in  all  $1S.:>,33,000.  That  is.  in  the  one  case  State  A 
would  he  giving  its  neighbor  M  a  share,  as  it  were,  in  the  revenues 
derived  from  its  own  large  local  traffic.  In  the  other  case  it  would  be 
keeping  all  this  for  itself.  The  United  States  courts,  being  interested 
in  the  protection  of  interstate  commerce  only,  would  not  interfere  in 
either  ea-e.  although  if  State  B  in  our  illustration  undertook  to  apply 
the  Maine  method  it  would  obviously  be  taxing  property  or  earnings 
outside  of  its  boundaries.  If  both  states  applied  the  same  method, 
obviously  do  objectionable  double  taxation  would  arise.  Mut  if  State 
A  applied  the  Minnesota  method  and  State  B  the  Maine  method,  the 
railroad  would  have  ground  for  objections,  as  being  doubly  taxed  on 
a  large  part  of  its  earnings.  Clearly,  the  most  equitable  system,  if 
universally  applied,  is  the  Minnesota  system.  It  does  not  undertake  to 
get  taxes  or  traffic  outside  its  own  bounds. 

California,  being  surrounded  by  a  vast  area  of  sparsely  populated 
territory  on  the  one  side  and  water  on  the  other,  is  in  the  position  of 
State  A  in  our  illustration.  She  affords  railroads  large  and  lucrative 
local  traffic,  compared  with  which  that  offered  by  Nevada,  Utah,  Ari- 
zona, and  New  Mexico  is  quite  small.  Furthermore,  a  very  large  part 
of  the  through  traffic  over  the  roads  entering  California  is  equitably 
due  California.  It  consists  of  the  imports  and  exports  of  California 
merchants,  and  owes  nothing  to  Nevada  or  Arizona,  except  the  privi- 
lege of  passing  through.  For  those  states  to  levy  a  tax  on  California's 
commerce  passing  through  their  boundaries  smacks  of  the  tolls  levied 
by  the  robber  barons  on  the  Rhine.  But  such  tolls  must,  however,  be 
submitted  to  under  the  construction  of  the  interstate  commerce  clause 
of  the  Constitution.  There  is,  however,  no  such  necessity  forcing  a 
surrender  of  the  revenue  on  purely  intra,  or  local  California,  traffic. 

The  foregoing  analysis  is  theoretical  and  illustrative  merely.  The 
essential  question  is  how  the  two  systems  would  affect  the  revenues. 
W'e  have  two  Large  interstate  railroad  systems  now  in  operation  and 
two  more  in  course  of  construction.  The  Southern  Pacific  Company, 
being  an  operating  company  merely,  reports  its  constituent  roads 
separately  to  the  State  Board  of  Equalization.     Of  the  constituent  com- 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  173 

parties,  only  one — the  Central  Pacific — is  an  interstate  road,  the  others 
beginning  and  terminating  within  the  State.  In  1904  the  Central 
Pacific's  gross  earnings  in  and  out  of  the  State,  excluding  ferry  and 
river  traffic,  were  $19,264,000,  as  reported  to  the  State  Board  of  Equal- 
ization. This,  apportioned  on  the  Maine  plan,  using  main  track 
mileage*  only,  would  give  California  a  gross  earning  of  $10,518,326.23. 

The  State  Board  of  Equalization  requires  the  railroads  to  report  their 
gross  earnings  in  California  computed  on  a  plan  which  closely  approxi- 
mates the  Minnesota  system.  It  should  be  said,  however,  that  as  these 
figures  serve  no  very  important  purpose,  being  for  general  information 
only,  there  is  some  doubt  as  to  the  care  with  which  they  are  compiled. 
The  State  Board  itself  has  criticised  them  as  inaccurate  in  several  cases. 
But  they  are  the  best  that  can  be  had,  and  hence  are  used. 

From  this  source  we  find  the  gross  earnings  in  California  of  the  Central 
Pacific  apportioned  by  the  Minnesota  plan  to  be  $10,595,383.34  — larger 
by  $67,000  than  by  the  Maine  plan.     This  difference  is  not  very  great. 

A  somewhat  larger  proportional  difference  is  found  if  we  take  the 
Southern  Pacific  Company's  system  as  a  whole.  The  $90,000,000  which 
that  great  system  earned  in  1904  was  at  the  rate  of  $9,842  per  mile  of 
road  operated,  or  for  the  3,350  miles  in  California  about  $33,000,000. 
The  gross  earnings  reported  to  the  State  Board  of  Equalization  were 
$35,800,000,  a  difference  in  favor  of  the  State,  under  the  Minnesota  plan, 
of  at  least  $2,800,000,  or  with  a  4%  tax  a  matter  of  $112,000. 

The  same  computation  applied  to  the  Santa  Fe  System  produces  the 
opposite  result.  Of  the  8,300  miles  in  this  system,  1,260  miles  lie  in 
California.  The  gross  receipts  of  the  entire  system  were  $68,171,200, 
or  $8,214  per  mile,  which  gives  $10,325,000  for  California's  share  of  the 
gross  receipts,  estimated  according  to  the  Maine  plan.  The  road  reports 
to  the  State  Board  of  Equalization  some  $10,149,102.28  as  its  gross 
earnings.  By  this  showing  the  returns  would  be  better  under  the 
Maine  plan  than  under  the  Minnesota  plan  by  $176,000  gross  earnings. 
But  there  is  some  doubt  as  to  whether  all  the  items  called  for  are 
included  in  the  Santa  Fe  report,  and  more  recent  corrected  reports  show 
the  reverse  to  be  true. 

It  these  two  instances  of  typical  railroad  systems  extending  through 
several  states  are  at  all  conclusive,  and  there  is  no  reason  to  suppose 
they  are  not  so,  then  it  makes  practically  no  difference  whether  we 
choose  the  Mainesystem  or  the  Minnesota  system.  The  selfish  interests 
of  California  will  be  safe  in  either  case,  and  jealousy  of  neighboring 
states  may  slumber.  This  being  the  ease,  we  may  fall  Itackon  theoretical 
considerations  of  what  is  likely  to  he  most  fair  to  the  railroads,  to  Cali- 
fornia, and  to  other  states  and  to  our  neighbors. 

*The  question  as  to  whether  main  track  or  Bingle  track  mil-age  should  be  used  will 
be  discussed  below. 


17  1  IMPORT  OF   COMMISSION   ON   REVENUE   AND   TAXATION. 

The  approved  definition. 

From  this  point  of  view,  gros-  earnings  may  safely  be  defined  so  as 

to  Include:  • 

(1)  All  receipts  from  business  beginning  and  terminating  in  Cali- 
fornia. This  all  belongs  to  California,  and  no  system  of  apportion- 
ment which  allows  or  permits  another  State  to  assume  the  right  to  tax 
any  portion  of  this  can  be  approved. 

(2)  The  receipts  from  traffic  other  than  by  sea  between  points,  one 
of  which  is  in  California  and  another  in  some  other  State,  whether  in  or 
out  bound,  should  be  assigned  to  California  in  proportion  as  the  mile- 
age of  such  traffic  in  the  State  is  to  the  total  mileage  covered  by  such 

traffic. 

(3)  The  receipts  from  traffic  originating  outside  California,  other 
than  that  which  comes  by  sea,  and  which  passes  entirely  through  Cali- 
fornia, should  be  assigned  to  California  in  proportion  as  the  mileage  in 
California  is  to  the  total  mileage  of  such  traffic. 

In  the  light  of  the  preceding  discussion,  these  three  propositions  are 
so  self-evident  that  they  require  no  further  proof  or  demonstration. 

Definition  of  mileage. 

Under  the  Maine  system  a  question  of  considerable  importance  is  the 

definition  of  the  mileage.  Shall  we  take  miles  of  main  track,  or  the 
miles  of  all  tracks,  reducing  double  track,  spurs,  and  sidings,  as  that 
basis?  ilailroad  reports  generally  use  main  track  for  most  apportion- 
ment purposes.  But  the  more  equitable  basis  for  purposes  of  taxation 
is  "all  tracks,"  inasmuch  as  the  presence  of  double  track,  of  spurs  and 
sidings  generally  indicates  a  denser  traffic. 

Cnder  the  system  proposed  above  this  question  is  of  no  importance, 
mileage  meaning  the  distance  a  given  shipment  is  hauled. 

The  relative  effect  of  a  gross  earnings  tax  on  different  railroads 
in  California. 

It  Is  -om ctimes  claimed  that  a  gross  earnings  tax  would  be  unfair  as 
between  the  different  railroads,  on  account  of  the  differences  in  the  pro- 
portion- of  net  earnings  to  gTOSS.* 

Stated  baldly,  this  contention  is  speciously  convincing,  as  the  net 
earnings  vary  from  3%  of  the  gross  earnings,  in  the  case  of  the  Pajaro 
Valley  Consolidated  Ilailroad  in  1905,  to  58%  of  the  gross  earnings,  in 
tin- case  of  the  Sierra    Railway  in   1D03.     But   the  logical  weakness  of 

•  1  he  representative  of  the  Pacific  Coast  I  tail  road  urged  thi>  with  special  force  before 

the  Commission. 


REPORT   OP   COMMISSION    ON   REVENUE    AND    TAXATION.  175 

anv  argument  based  on  the  supposition  that  equity  in  taxation  is  better 
measured  by  comparison  with  net^  earnings  than  with  gross  earnings 
on  property,  has  been  exposed  above.  We  must  take  into  consider- 
ation every  possible  detail,  such  as  character  of  traffic,  property  used, 
net  and  gross  earnings,  etc.,  .before  reaching  a  conclusion.  The  whole 
question  as  to  the  relative  fairness  of  a  gross  earnings  tax  as  between 
the  different  roads  is  so  important  that  it  can  not  be  passed  over  with  a 
mere  generalization. 

Although  the  two  great  systems,  the  Southern  Pacific  and  the  Santa 
Fe,  together  pay  by  far  the  greater  part  of  all  the  taxes  (1903,  94%; 
1904,  94%;  and  in  1905,  93%),  it  is  nevertheless  important  that  the  new 
tax  system  should  not  work  an  injustice  to  the  smaller  roads,  even 
though  they  pay  only  6%  or  7%  of  the  total  taxes.  The  proportion  that 
they  pay  is  increasing  each  year  as  they  grow  in  size  and  business. 

Our  two  tables — the  one  on  page  104  and  the  one  constructed  from  it 
on  page  166— include  all  the  taxes  paid  by  the  railroads,  State,  county 
and  municipal  together,  in  1904.  Figures  are  not  available  for  later 
years.  The  destruction  of  the  tax  records  of  the  Southern  Pacific  Com- 
pany in  San  Francisco,  deprived  us  of  the  opportunity  of  getting  the 
figures  for  that  company,  and  as  it  alone  pays  three  fourths  of  the  rail- 
road taxes,  this  made  it  useless  to  put  other  companies  to  the  trouble 
of  getting  up  their  figures.  This  misfortune-  is  not  serious,  as  we  have 
the  returns  of  the  State  Board  of  Equalization  for  the  other  years. 
Almost  precisely  the  same  proportions  exist  between  the  taxes  levied 
on  the  State  Board  assessment  of  the  different  roads  as  between  the 
total  taxes,  and  as  these  State  and  county  taxes  constitute  about  75% 
of  the  whole,  no  serious  error  can  arise  from  using  them  for  the  purpose 
of  this  comparison.  In  fact,  they  may  be  regarded  as  better  for  this 
purpose  than  the  total  taxes,  being  more  homogeneous  and  resulting 
from  a  more  settled  policy  than  is  pursued  by  the  assessors. 

The  following  set  of  tables  has  been  prepared  to  facilitate  a  study  of 
the  various  factors  involved  in  this  problem. 

The  first  is  a  comparison  of  the  relative  amounts  of  taxes  paid  under 
the  present  system  in  each  of  the  three  years,  1903,  1904,  and  1905,  with 
the  relative  amounts  under  a  gross  earnings  tax. 

The  second  shows  the  gross  and  net  earnings  and  the  percentage  of 
net  to  gross  for  the  same  years. 

The  third  is  in  part  a  recapitulation  showing  the  percentage  of  net  to 
gross  earnings,  and  adds  a  column  showing  the  percentage  of  all  taxes 
to  gross  earnings  in  1904  and  another  showing  the  approximate  mileage. 


176 


REPORT   OF    commission    ON    RBVEN1   I.    \NI>   TAXATION. 


TABLE   A. 

Showing  the  Relative  Amount  of  Taxes  Paid  by  Different  Railroads,  under  Present 
System  and  which  would  be  Paid  under  Proposed  System. 

All  taxes  levied  on  railroad  property  assessed  by  the  county  assessors  and 

city  taxes  are  omitted. 

1903. 


Name  of  Kuilroa.l. 


Southern  Pacific  System 

San i a  }•"<■  System. 

Cal.  X.  W.  and  N.  S 

Nevada-Ca  I  i  for  nia-Oregon  and 

Sierra  Valleys  —  — 

N.\  ada  County  Narrow  Gauge 

Pacific  Coast 

Pajaro  Valley  Cons ... 

Sierra  Railway  ... '.-- 

Boca  and  Loyalton  

Lake  Talioe . 


Present  8j  Btem. 


Btate  and 

County  Taxes 

i..\  Led  on 

sun.  Board 

A.-«i'Ssinelit. 


Per 
Cenl 

of  All 

Taxes 

on  Kn.il 

roads. 


Proposed  System. 


4  Per  Cent  Per 

Gross  l-'iirnings     Cent 
Tax,  Based  on     of  All 
i .  ross  Karnings    Ta  x.-s 
of  Previous     on  Rail 
Year,  roads. 


Totals. 


$816,660  72 

208,450  7' i 

41,998  96 

4,822  16 

2,643  64 

1,446  30 

2,826  42 

4,503  98 

2,988  22 

992  96 


$1,090,338  06< 


74.!  12 
19.12 

3.85 

.44 
.24 
.41 
.26 
.41 
.27 
.09 


100.00 


11,300,703  48 
69,871  14 

.-..SH2  62 


4.43S 
1.2  li 
3,937 
12  257 
3,637 
1,167 


74 

:;i 

83 
70 
55 


71.12 
19.87 

.33 
.25 
.21 
.22 
!70 
.21 
.067 


Column 
duoed  to  Same 

Total  as 
Column  1. 


$808,200  oo 

216,700  00 

43.400  00 

3,597  00 

2.726  00 

2,617  00 

2,399  00 

7,633  00 

2,290  00 

72:.  («i 


$1,754,862  81  100.00   $1,090,287  00 


1904. 


Southern  Pacific  System   

Santa  F.'  Sv stein 

Cal.  N.  W.and  X.  8 

Nevada-California-Oregon  and 

Sierra  Valleys 

Nevada  County  Narrow  Gauge 

Pacific  Coast 

Pajaro  Valley  Cons. 

Sierra  Bail  way 

Boca  and  Loyalton 

Lake  Tahoe --- 

Totals 


$917,910  24 
215,037  50 

42,61!  i  24 

1,849  02 
2,737  10 
4,657  36 
3,530  :>4 
7,115  92 
1,467  66 
1,110  26 


76.23 

17.86 

3.54 

.40 
.23 
.39 
.29 
.59 
.37 
.092 


$1.204.t  131  X4*  lm.oo 


$1,434,449  29 

402.336  32 

7-     - 


7,512 
5,084 
4,652 
2,013  31 

If.. 700  L5 
5,40 


59 
98 
29 


56 


1,328  o2 


$1,957,532  69 


7  I  2- 

20.55 

1.03 

.38 

.2.; 

.21 
.10 

.si 
,2s 
.069 


L oo.oo 


$882,300  00 

247. loo  ihi 
48,52 

4.575  00 
3,131  oo 

10 

1.204  (Hi 
9,746  ini 
:;  ::72  00 

830  00 


$1.20o.96S    IHI 


1905. 


South. tii  Pacific  System 

Santa  !•'.'■  System    '    

Cal.  N.  W.and  N.  8 

Nevada  <  !alifornia-<  Oregon  and 

Sierra  Valleys  

Salt  Lake  Railroad  

Nevada  County  Narrow  Gauge 
Pacific  <  loasl  

o  Valley  Cons. 
Sierra  Railway 

and  Loyalton  — 

Lake  Taboe        


Totals 


$982,099  70 

241,497  52 

12,938  90 

l   i28  21 
15,8 
2,596 

i  ..11 
2.6 n;  1 1 
8,084  58 
1,719  88 
990  36 


is 


74.555 

IS. 714 

3.827 

.351 

1.227 
.201 
.85 
.2i  15 
.627 
.366 
077 


$1,508,957  96      74.17 
108  64      L8.436 
S2.027  41        1.032 


7,660  'it 

21.12:;  92 

5,125  10 

5,806  60 

■  15  88 

1  I  6,7  21 

6,936  3o 

1,265  l" 


.374 
1.205 
.251 
.285 
.124 
.720 
.841 
,082 


$'157,200  00 

237.90 

52,030  oo 

1  -27  00 

15,490  00 

39  00 

3,678  00 

1,603  00 

9,286  00 

1,401  00 

800  00 


$1,290,438  04^100.000    $2,034,505  42    100.000      $1,290,454  00 


*  Tit  i  -  does  not  contain  county  taxes  on  county  assessor's  as — incut,  nor  city  and  school 
district  taxes,    it  is  about  75  per  ceni  ol  the  total. 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 


177 


TABLE  B. 


Gross  Earnings  and  Net  Earnings  and  Mileage  of  California  Railroads  1903-1905. 

1903. 
(Previous  Year.) 


Name  of  Railroad. 


Mileage. 


Southern  Pacific  System - 

Santa  F6  System  

Cal.  N.W.  and  North  Shore 

Western  Pacific  

Nev.-Cal.-Ore.  and  Sierra  Val'ys 

Sierra  Railway 

Nevada  County  Narrow  Gauge  . 

Pacific  Coast , 

Pajaro  Valley  Cons. 

Lake  Tahoe. - 


Totals 


3,113 

1,095 
250 
75.28 
144.63 
75.94 
22.50 
76.10 
32.90 
15.30 


Gross 
Earnings 


Gross 

Earn'gs 

per 

Mile. 


$32,517,587  08 

8,720,051  27 

1,746,778  46 

183,932  55 

145,065  53 

306,445  64 

110,968  57 

106.108  55 

98,434  11 

29,188  73 


$43,964,560  49 


$10,447 
7,962 
6,986 
2,443 
1,003 
4,036 
4,934 
1,396 
2,992 
1,908 


Net  Earnings. 


Per 

Cent 

Net  of 

Gross 

Earn'gs. 


I 


$12,166,614  26 

3,280,744  15 

547,794  77 

70,777  38 


57.361 

179,672 

16,651 


86 
63 
71 


35,633  28 


27,753 

12,646 


80 
30 


$16,395,650  14 


37.5 
37.7 
31.3 
38.5 
39.5 
58.6 
15.0 
33.6 
28.2 
43.3 


37.3 


1904. 
(Previous  Year.) 


Southern  Pacific  System 

Santa  Fe  System 

Cal.  N.W.  and  North  Shore 

Western  Pacific. 

Nev.-Cal.-Ore.  and  Sierra  Val'ys 

Sierra  Railway  . 

Nevada  County  Narrow  Gauge  . 

Pacific  Coast..- 

Pajaro  Valley  Cons. 

Lake  Tahoe 

Salt  Lake  Railroad 


Totals 


3,151.08 

1,190.58 

250.02 

78.28 

152.18 

75.94 

22.50 

76.10 

33.63 

16.10 

102.24 


$35,861,232  19 

10,058,408  03 

1,974,554  45 

225,883  18 

187,814  71 

394,153  86 

127,124  42 

116,307  23 

50,332  65 

33,200  58 

436,588  50 


$10,700 
8,446 
7,897 
2,886 
1,234 
5,192 
5,650 
1,529 
1,496 
2,062 
2,314 


$49,465,599  80 


$13,113,848  81 

3,968,087  62 

513,018  65 

100,867  03 

79,173  52 

185,882  17 

51,931  83 

30,151  04 

2,219  07 

10,869  91 

154,518  50 


$18,210,568  15 


36.6 
39.5 
26.0 
44.6 
42.2 
4L2 
40.9 
26.0 
4.4 
32.7 
35.4 


36.8 


1905. 


Southern  Pacific  System . 

3,330.77 

$37,723,948  99 

$11,326 

$13,350,768  13 

35.4 

Santa  F6                ... -- 

1,194.66 

255.83 

9,377,715  82 
2,050,686  49 

7,849 
8,016 

2,776,102  45 
347,253  15 

29.6 

Cal.  N.W.  and  North  Shore 

16.9 

Western  Pacific . 

79.88 

254,602  82 

3,188 

118,012  78 

46.3 

Nev.-Cal.-Ore.  and  Sierra  Val'ys 

152.18 

11(1,516  15 

1,257 

83,589  95 

43.6 

Sierra  Railway  - -- 

75.94 

366,430  59 

4,825 

121,187  93 

33.1 

Nevada  County  Narrow  Gauge  . 

22.50 

128,134  68 

5,695 

41,464  34 

32.4 

Pacific  Coast 

76.10 

145,164  97 

1,908 

32,010  42 

22.1 

Pajaro  Valley  Cons. ..  

38.88 

63,397  19 

1,630 

1,827  21 

2.8 

Lake  Tahoe 

16.10 

31,634  86 

1,«.  165 

9,293  38 

29.4 

Salt  Lake  Railroad 

227.93 

610,597  84 

2,679 

236,726  92 

38.8 

Totals          - 

5,470.77 

$50,943,830  40 

9,314 

$17,118,236  66 

33.6 

12  — RT 


178 


REPORT   OF    COMMISSION   ON    REVENUE   AND   TAXATION. 


TABLE  C. 

Ratio  of  Net  Earnings  to  Gross  Earnings.     Percentage  of  all  Taxes  now  paid  to  Gross 

Earnings. 


Name  nf  Railroad. 


Southern  Pacitic  System 

Santa  F€  System -- • 

California  Northwestern  and  North  shore 

Western  Pacific ---: ----  — 

KTerada-California-Oregon  and  Sierra  Valleys 

Sierra  Railway ■ 

Nevada  Oonnty  Narrow  Gauge 

Pacific  Coast.. • 

Paiaro' 

Lake  Tahoe --• 

Salt  Lake 


Per    Cent    of    Net     PerCentofall 
Earnings  t"  -  Paid  to 

i.ross.  Gross  liicome. 


1908. 


37.5 

37.7 

31.3 

38.5 

39.6 

58.6 

L5 

33.6 

43.3 


1904. 


36.3 

26 
14.6 
12.2 
47.2 
40.9 
26 
4.4 
31!.  7 

:;:>.  i 


1906. 


29.6 
16.9 
46.3 
13.6 
33.1 
32.4 
22. 1 
2.8 
29.4 


1904. 


3.76 
■2.'.r2 
3.17 
4.28 
2.49 
2.14 
2.67 

5.72 
5.12 
6.24 


Summapy  of  the  tables. 

The  points  shown    by  the    tables    may    be    summarized    briefly,  as 

follows: 

(1)  On  the  basis  of  all  taxes,  as  per  table  for  1904  (pp.  119  and  166), 
the  4%  gross  earnings  tax  would  increase  the  taxes  of  six  roads  with 
a  combined  mileage  of  5,041  miles,  and  decrease  the  taxes  of  five  roads 
with  a  combined  mileage  of  306  miles. 

The  increase  is  needed  by  the  Government  and  justified  by  the 
ability  of  the  roads  to  pay,  and  the  necessity  of  levying  a  tax  on  them 
equal  to  the  burden  on  other  property. 

(2)  On  the  basis  of  State  and  county  taxes  there  is  no  great  change 
in  the  position  of  the  two  large  systems  as  compared  with  the  smaller 

roads. 

(3)  The  smaller  roads  change,  in  some  instances   considerably,  in 

relation  one  to  the  other. 

(4)  The  two  large  roads  are  normal  so  far  as  the  proportion  of  net 
earninge  is  concerned.  But  the  small  road-  are  far  from  normal,  the 
mountain  roads  especially  Bhowing  high  net  earnings. 

It  will  be  seen  from  the  above  tables  thai  a  gross  earnings  tax  would 
not  have  changed  materially  the  proportion  of  all  taxes  paid  by  the 
two  Largesl  Bystems  together,  as  compared  with  the  smaller  roads. 

Xh,-  proportion  of  taxes  paid  by  the  Santa  Fe"  would  have  advanced 
slightly  as  compared  with  those  of  the  Southern  Pacific,  bul  con- 
siderably in  absolute  amount.  But  the  tables  further  show  that  the 
ganta  Fd  has  been  enjoying  a  Bomewhal  Low  assessment  as  compared 
with  its  earning  power  and  as  compared  with  other  roads.  Cts  taxes 
are  oniy  $18]  p-r  mile,  against  $274  for  the  Southern  Pacific,  and  only 
2.92     of  its  gross  earnings  as  compared  with  3.76%  for  the  Southern 


REPORT   OP   COMMISSION   ON   REVENUE   AND   TAXATION.  179 

Pacific.     The  increase  in  the  proportion  of  taxes  on  this  road  would  be 
fully  justified  by  the  conditions. 

The  Southern  Pacific  System  and  the  Santa  Fe  are  essentially  normal 
railroads,  so  far  as  the  proportion  of  net  to  gross  earnings  is  con- 
cerned. But  in  1905  the  percentage  of  net  earnings  of  the  Santa  Fe 
fell  to  29.6  in  California  and  33.5  for  the  whole  system.  This  decline  is 
temporary,  and  is  accounted  for  in  the  company's  Tenth  Annual  Report 
to  its  stockholders  by  the  decreased  earnings  and  increased  operating 
expenses  due  to  floods.  (See  pages  18  and  19  of  the  Report  of  the 
President  of  the  Santa  Fe  Railway  Company  for  1905.)  It  would 
appear,  then,  that  any  increase  in  the  burden  of  taxes  on  this  road 
under  the  gross  earnings  tax  during  1905  would  be  ascribable  to  mis- 
fortunes similar  to  those  which  often  befall  other  taxpayers  without 
abatement  of  their  taxes.  A  farmer's  crops  may  be  damaged  by  flood, 
but  his  taxes  are  not  on  that  account  reduced. 

Passing  now  to  the  smaller  roads.  The  first  is  the  California  North- 
western and  North  Shore,  whose  present  taxes  are  3.17%  of  the  gross 
earnings.  Its  relative  standing  would  not  have  been  changed  materi- 
ally in  1903.  But  in  1904  and  1905  its  taxes  on  the  gross  earnings  plan 
would  have  advanced  from  about  3^%  of  the  total  railroad  taxes  to 
about  4%,  an  increase  of  about  one  seventh.  This  road,  moreover,  made 
very  small  net  earnings  during  1904  and  1905.  But  this  road  has 
recently  been  reorganized,  and  its  auditor  reports  that  there  is  every 
reason  to  regard  it  as  a  normal  railroad,  likely  to  earn  the  average  rates 
in  future  years.     The  gross  earnings  tax  will  be  fair  in  this  case. 

The  three  mountain  roads  should  be  considered  together.  They  pre- 
sent much  the  same  peculiarities;  their  percentage  of  net  earnings 
fluctuates  considerably  from  year  to  year,  and  the  percentage  of  taxes 
to  gross  earnings  is  uniformly  low,  under  the  present  system.  The 
gross  earnings  tax  would  mean  considerable  of  an  increase  to  them. 
But  as  a  group  they  have  high  net  earnings,  and  can  well  afford  to  meet 
an  increase  in  taxation. 

The  remaining  four  roads,  omitting  the  Western  Pacific,  now  pay  5% 
or  over  of  their  gross  earnings  in  taxes.  Their  taxes  would  be  reduced 
under  the  new  plan. 

One  of  these,  the  Pacific  Coast,  is  a  narrow-gauge  road  in  competition 
with  a  broad-gauge  road.  It  claims  that  its  proportion  of  expenses  to 
gross  earnings  is  unusually  high  on  that  account.  There  is  every  rea- 
son to  suppose  that  this  claim  is  correct.  In  that  case  the  reduction 
proposed  in  its  tax  burden  is  fully  justified.  An  even  greater  reduc- 
tion  would  not  be  improper,  hut  the  commission  fan  find  no  way  in 
which  this  road  could  be  put  in  a  class  by  itself. 

The  Pajaro  Valley  Consolidated  seems  to  be  making  :i  poor  showing, 
having  less  than  3%  net  earnings  in   1905  and  only  a  trifle  over  4  £  in 


ISO  REPORT   OF   COMMISSION   ON    REVEN1   I.    AND    TAXATION. 

190-1.  as  against  36%  for  a  normal  railroad.  A  reduction  in  its  taxes 
mis  on  this  showing  at  least  to  be  justified.  It  is  a  road  devoted 
Largely  to  private  traffic. 

The  Lake  Tahoe  Railroad  has  a  short  season.  Its  income  is  practi- 
cally a  ><ini-;iiinuul  income,  and  when  taxed  on  its  property  the  taxes 
are  relatively  high.  A  reduction  here  would  seem  to  be  justified,  so  far 
as  can  be  determined  from  the  data  at  hand. 

The  Salt  Lake  road  is  in  process  of  construction  and  is  operated  only 
in  part.  It  imw  pays  taxes  on  roadbed  not  operated.  Hence,  the  high 
rate  of  taxation.  The  figures  are  therefore  not  conclusive  one  way  or 
the  other.  When  fully  in  operation  its  taxes  if  on  great  earnings  will 
probably  be  equitable. 

The  Western  Pacific  consists — so  far  as  our  tables  are  concerned — of 
the  Boca  and  Loyalton,  a  road  in  the  high  Sierras,  and  the  Alameda 
and  San  Joaquin,  a  coal  road  running  across  a  part  of  the  San  Joaquin 
Valley.  The  figures  show  that  a  A'/0  gross  earnings  tax  would  slightly 
reduce  their  present  taxes.  But  of  course  these  figures  are  not  conclu- 
sive as  to  what  these  roads  will  pay  when  the  new  transcontinental  road 
is  in  operation. 

In  respect  to  both  of  these  roads  it  should  be  observed  that  all  incom- 
pleted sections  until  actual  operation  is  begun  would,  under  the  Com- 
mission's plan,  be  taxable  by  the  local  authorities  as  property  not  used 
in  operation. 

Conclusion. 

From  the  foregoing  analysis  it  is  obvious  that  the  gross  earnings  tax 
would  be  as  equitable,  between  road  and  road,  as  any  system  which  can 
be  devised.  No  system  of  taxation  has  ever  been  devised,  or  can  be 
devised,  which  would  make  allowance  for  every  modifying  circumstance. 
Taxation  absolutely  just  is  only  a  dream.  Taxation  on  gross  earnings 
comes  as  close  to  taxation  according  to  ability  as  any  plan  yet  devised. 

The  rate. 

Of  every  $100  taken  in  as  gross  earnings  from  operation  by  railroads, 
from  $34  to  $39  are  net;  that  is,  are  available  to  pay  interest,  dividends, 
or  other  capital  charges.  The  normal  percentage  of  net  to  gross  in 
( lalifornia  is  about  36%.  If  1%,  or  $1.00  per  $100  of  full  cash  value, 
is  a  fair  rate  of  taxation  on  property  in  general,  then  a  tax  at  4%  on 
gross  earnings— the  highest  rate  of  the  gross  earnings  tax  in  other 
States— assumes  that  railroad  earnings  should  be  capitalized  at  9%. 
If  we  decide  that  railroads  should  be  capitalized  at  8%,  then  a  gross 
earnings  tax  rate  of  4\-' '<  would  be  the  equivalent  of  1%  on  property. 
Assuming  that  7','    is  the  proper  rate  of  capitalization,  the  gross  earn- 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  181 

ings  tax  ought  to  be  a  trifle  over  5%.  At  6%  as  the  rate  of  capitalization 
the  gross  earnings  tax  rate  should  be  6%. 

The  United  States  Census  Office,  in  an  elaborate  attempt  to  determine 
the  commercial  value  of  railroads,  ascertained  that  in  1904  the  Southern 
Pacific  Company  was,  according  to  the  market  quotations  of  its  stocks 
and  bonds,  actually  capitalized  at  5.655%  ;  the  Santa  Fe  at  5.172%. 
To  these  rates,  which  are  net,  less  taxes,  we  have  to  add  about  1%  for 
taxes,  making  the  market's  opinion  as  to  the  proper  return  on  these 
companies'  investments,  plus  the  taxes:  For  the  Southern  Pacific  6.6%, 
for  the  Santa  Fe  6.2%.  At  6.6%  as  the  rate  of  capitalization  the  tax 
rate  on  gross  earnings  should  be  51/2%. 

The  Commission  is  of  the  opinion  that  the  rate  on  gross  earnings  of 
railroads  should  not  be  less  than  4%  nor  over  5%. 


182  KKPORT  OF   COMMISSION   ON    REVENUE   AND   TAXATION. 


CHAPTER  V. 

TAXATION  Or  PUBLIC-SERVICE  CORPORATIONS  OTHER 

THAN  RAILROADS. 


Section      1.  Street  Railways. 

1 1.  Expbbss  Companies. 

III.  Car  Companies. 

IV.  Telegraph  and  Telephone  Companies. 
V.  Light,  Heat,  and  Power  Companies. 

VI.  A  1.1.  other  Pihlic-Service  Corporations. 


SECTION  1. 


TAXATION  OF  STREET  RAILROADS. 


As  subjects  for  State  taxation. 

Street  railroads  are  recommended  as  subjects  for  State  taxation  pri- 
marily because  it  is  but  equitable  that  urban  communities  should 
surrender,  for  State  taxation,  that  which  is  the  proper  equivalent  of 
what  the  rural  communities  give  up  by  surrendering  the  strain  railroads. 
Unless  the  entire  transportation  systems  in  and  out  of  cities  are  trans- 
ferred to  the  State  for  purposes  of  taxation,  the  new  tax  system  would 
be  inequitable  as  between  urbau  and  rural  communities. 

Moreover,  with  the  growth  of  interurban  electric  lines  closely  affili- 
ated with  street  railway  systems,  and  the  continued  existence  of  steam 
lines  doing  Btreel  railway  business,  the  distinction  between  street  rail- 
roads and  ordinary  railroads  becomes  increasingly  difficult  to  define. 
The  Local  (-team)  lines  between  San  Francisco  and  Oakland,  Berkeley, 
and  Alameda,  which  are  an  integral  part  of  the  transcontinental  rail- 
way operated  by  the  Southern  Pacific  Company,  compete  directly  for 
street  traffic  with  the  local  electric  Lines.  The  "street  car  system"  of 
Santa  Rosa  now  nm~  to  lvtalnma,  and  the  ''  Huntington  Lines"  in  the 
south  arein  no  Bense  exclusively  "street"  railroads.  The  distinction 
between  the  two  can  not  be  drawn  on  the  character  of  the  motive  power, 
for  the  older  steam  railroads  may  be  transformed  into  electric- roads; 
nor  can  it  rest  on  the  use  of  public  stri  ets  or  highways,  for  street  elec- 
tric railroads  are  often  run  on  a  private    right-of-way   and   steam   roads 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION  183 

on  public  highways  and  streets;  nor  on  the  source  of  the  franchise; 
nor  on  the  character  of  the  traffic,  for  street  railroads,  in  the  commonly 
accepted  sense,  may  carry  freight  as  well  as  passengers,  may  stop  only 
at  appointed  stations,  may  issue  tickets,  etc.  In  short,  the  line  of 
demarkation  between  street  railroads  and  steam  railroads,  so  "clear  in 
every  one's  mind,"  is  not  susceptible  of  legal  definition. 

For  the  above  reasons,  and  for  east-  and  certainty  of  administration 
of  the  tax  system,  the  entire  railroad  transportation  industries,  street 
as  well  as  steam,  should  be  subjects  of  State  taxation  only. 

Property  tax  inapplicable. 

In  the  case  of  street  railroads  the  old  general  property  tax  is  pecul- 
iarly inappropriate  and  unsatisfactory.  This  is  mainly  because  the 
value  of  the  property  can  not  be  determined  without  reference  to  the 
earnings;  to  the  value  of  the  franchises  and  the  length  of  time  they 
have  to  run;  to  the  probability  of  the  renewal  of  the  franchises  and 
the  probable  terms  of  such  renewal:  to  the  condition  of  operation;  to 
the  probability  of  a  growth  in  the  population  served;  to  the  probability 
of  restrictive  conditions  on  rates  and  service  which  may  be  applied  by 
city  civic  authorities;  to  the  probability  of  competition,  and  to  a  num- 
ber of  other  "probabilities"  none  of  which  can  be  any  more  definitely 
measured  than  those  just  enumerated.  In  almost  all  cases,  in  all 
important  cases  affecting  large  interests  of  this  character,  the  original 
"  investment "  or  cost  of  construction  is  no  longer  ascertainable.  All 
the  older  street  car  properties  and  franchises  have  changed  hands  sev- 
eral times  and  the  old  original  accounts  as  to  "cost."  "  renewals."  "  new 
construction,"  "  depreciation,"  and  other  matters  necessary  to  a  knowl- 
edge of  how  much  has  been  "put  in"  or  "taken  out"  of  the  property, 
have  either  been  lost,  destroyed,  or,  on  account  of  the  failure  to  con- 
tinue them  from  year  to  year  on  a  uniform  plan,  have  lost  all  meaning 
or  significance. 

The  United  States  Census  Bureau  has  this  to  say  on  the  above  point: 

It  is  quite  impossible  to  obtain  accurate  information  as  to  the  actual  amount  of 
money  which  lias  been  spent  in  the  construction  and  equipment  of  street  railways  in 
general,  or  of  most  individual  street  railways.  The  item,  "cost  of  construction.'  as 
carried  on  the  books  and  balance  sheets  of  street  railway  companies,  gives,  in  most 
cases,  no  idea  whatever  of  the  cash  investment.  The  intervention  of  construction  com- 
panies composed  Of  the  promoters  of  the  railway  lias  in  many  cases  rendered  the  hook 
value  of  properties  misleading,  and  other  similar  reasons  might  be  given.  The  most 
important  ditliculty.  however,  is  that  the  greatesl  railway  systems  now  existing  have 
been  built  up  by  combination  and  recombination.  The  cost  which  a  company  enters 
upon  its  books  when  it  buys  another  system  is  the  amount  of  cash  or  securities  which 
it  has  paid  for  the  going  concern.  This  amount  is  based  upon  the  earning  capacity, 
largely,  if  not  wholly,  irrespective  of  original  cost.  The  records  of  cost  of  the  absorbed 
companies  are  no  longer  accessible,  and  even  if  they  were  would  probably  QOl  Bhow  cor- 
rectly the  actual  investments.  Estimates  of  engineers  regarding  the  COS1  of  construction 
hold  good  only  for  the  conditions  of  the  given  time  and  place,  and  may  be  very  far  from 
correct  as  applied  to  the  great  majority  of  existing  railway-. 


1M  REPORT  OF   COMMISSION    ON    REVENUE    AND   TAXATION. 

It  is  therefore  Impossible  to  Learn  the  "investment."     But  even  if  it 

were  possible  to  ascertain  the  "investment,*'  that  figure  would  be  very 
nearly  as  little  of  importance  as  it  would  he  in  the  ease  of  a  mine  or  an 
oil  well.  The  true  present  value  of  a  street-ear  property  depends  solely, 
:is  does  that  of  a  mine,  on  what  can  be  taken  out — on  the  gross  yield) 
Less  operating  expenses,  and  depreciation.  The  only  item  ascertainable 
with  any  degree  of  certainty  i^  the  gross  receipts;  all  others  are  vari- 
able and  uncertain,  being  subjects  of  ''judgment,"  open  to  "difference 
of  opinion,"  etc. 

The  gross  earnings  tax. 

The  gin--  earnings  tax  is,  therefore,  suggested  by  the  very  fact  that 
any  other  sort  of  tax  is  uncertain  and  indeterminate  in  application  and 
operation,  and  must  directly  or  indirectly  refer  back  to  the  earnings. 
It  has,  moreover,  in  this  case  as  elsewhere,  all  its  usual  advantages  of 
certainty  and  ease  of  administration,  of  steady  yield  and  steady  growth. 
of  satisfaction  to  the  public  and  to  the  companies.  It  is  notable  that 
whenever  cities,  instead  of  selling  street-car  franchises  outright,  for  a 
cash  down  payment,  lease  or  rent  them  for  a  term  of  years,  they  almost 
universally  prefer  a  percentage  of  the  gross  earnings  as  the  annual 
rental  charge,  to  a  fixed  annual  payment.  The  reasons  which  incline 
both  parties,  the  companies  and  the  cities,  to  regard  this  as  the  fairest 
and  most  satisfactory  form  of  the  bargain,  apply  with  full  force  to  the 
question  of  taxation.  At  the  end  of  this  section  will  be  found  a  sum- 
mary of  the  practice  of  other  states  when  they  depart  from  the  general 
property  tax  for  the  taxation  of  this  class  of  corporations.  It  will  be 
noted  that  the  most  common  method  is  one  based  on  gross  earnings. 

The  rate  of  the  gross  earning-s  tax. 

In  order  to  determine  the  proper  rate  for  the  gross  earnings  tax  which, 
it  is  assumed,  should  be  the  approximate  equivalent  of  1%  on  the  true 
value  of  the  property,  the  Commission  has  used  every  endeavor  to 
ascertain  the  normal  proportion  of  net  earnings  to  gross  earnings.  This 
has  proven  a  far  more  dillicult  task  than  in  the  case  of  some  other 
classes  of  corporations. 

The  ratio  of  net  to  gross  earnings. 

The  following  table  summarizes  the  results  of  several  different 
attempt-  to  ascertain  the  ratio  of  such  net  earnings  to  gross  earnings, 
without  allowance  for  depreciation. 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  185 

Ratio  of  Net  Earnings  to  Gross  Earnings  of  Street  Railroads. 
(Depreciation  not  included.) 

From  the  Preliminary  Report  of  this  Commission,  including  California  railroads 

with  gross  earnings  amounting  to  18,369,987.59 45.55% 

From  the  U.  S.  Census  investigation  of  1902.  35  California  companies  with  gross 
earnings  of  $9,967,288 - ..45.8 

From  the  U.  S.  Census  1902,  for  the  United  States  at  large 42.5 

From  data  furnished  by  the  companies  to  and  published  by  the  American  Street 
Railway  Journal  for  31  companies  in  all  parts  of  the  United  States  with  com- 
bined gross  earnings  of  $35,903,561 .. - .43.3 

From  more  extended  returns  by  California  companies  after  the  publication  of  the 
Preliminary  Report;  including  in  many  cases  several  years'  returns;  by  add- 
ing several  years'  returns  together  a  total  gross  earnings  of  $19,877,903 43.75 

From  the  figures  in  its  possession  at  the  time  of  the  publication  of  the 
Preliminary  Report,  the  Commission  reached  the  following  conclusion: 

"Assuming  that  the  fair  rate  of  taxation  on  property  is  1%  of  the 
market  value,  and  assuming  that  investors  in  street  railroad  securities 
are  entitled  to  a  return  of  6%  upon  their  investment,  a  fair  tax  rate 
upon  street  railroads  would  be  about  8%  of  the  gross  earnings.  If  we 
assume  that  the  earnings  should  be  capitalized  at  7%  the  tax  rate  on 
gross  earnings  would  be  6|%.  At  8%  as  the  basis  of  capitalization  the 
tax  would  be  a  trifle  under  6%.  The  taxes  now  paid,  which  are  about 
5%*,  assume  a  capitalization  of  earnings  at  about  9^%. 

"It  is  the  opinion  of  the  Commission  that  the  tax  on  the  gross  earn- 
ings of  all  railroads,  other  than  steam  intercounty  railroads,  should 
not  be  less  than  6%  nor  more  than  8%. 

"The  general  laws  of  California  require  that  after  five  years  of 
operation  street  railroads  shall  pay  2%  of  the  gross  earnings  to  the  local 
government  which  granted  them  their  franchises.  The  San  Francisco 
charter  imposes  still  higher  rates  and  eventual  forfeiture  of  rights  to  the 
city.  These  charges  were  imposed  at  a  comparatively  recent  date — 
1903-1905  —  and  do  not  apply  to  franchises  granted  before  that  time. 
They  are,  moreover,  of  the  nature  of  a  rental,  or  a  consideration  for 
the  grant  of  the  franchises,  an  annual  payment  in  place  of  a  single  cash 
payment,  and  they  are  in  no  proper  sense  taxes.  They  should,  therefore, 
be  excluded  from  consideration  in  connection  with  the  proposed  rates." 

Criticism  of  the  above  figures. 

After  the  publication  of  the  Preliminary  Report  the  street  railroad 
companies'  representatives  came  forward  with  a  most  vigorous  criticism 
of  the  conclusions  reached  and  of  the  figures  used  to  support  them. 

Aside  from  the  fact  that  the  street  railroad  interests  objected,  as  did 
every  other  class  of  corporate  interests  which  appeared  before  the  Com- 

*This  covered  only  15  companies;  later  and  additional  returns  show  the  true  average 
to  be  4.01    . 


186  BEPOBT  OF   COMMISSION  ON   REVENUE   AND   TAXATION. 

mission,  in  any  material  Increase  in  their  presenl  taxes, these  criticisms 
can  be  reduced  to  one  main  point.  That  point  was  that  the  figures 
used  took  do  account  of  depreciation. 

It  w&e  urged  that  the  figures  were  taken  from  accounts  prepared  for 
the  use  of  stockholders  ami  investors,  ami   so  far  as  they  were  taken 

from  BUCh  published  accounts  were  figures  intended  primarily  for  the 
USe  of  persons  assumed  to  be  able  to  make  proper  allowance  for  depre- 
ciation and  for  any  changes  in  the  condition  of  the  property.  It  was 
further  urged  that  as  these  figures  were  to  be  used  to  measure,  in  a  way. 
the  value  of  the  property,  they  should  he  amended  so  as  to  allow  for  an 
annual  depreciation  charge  in  addition  to  operating  expenses  before 
reaching  the  percentage  «>f  net  earnings  to  Lrro~s  earnings.  It  was 
pointed  out  that  street  railway  franchises  had  a  limited  life,  running 
only  twenty,  twenty-live,  or  forty  years  from  date  of  granting,  and  that 
a-  their  renewal  and  the  terms  on  which  they  would  be  renewed  were 
all  uncertain,  a  wise  policy  required  that  the  entire  investment  should 
be  made  good  from  the  earnings  before  the  life  of  the  franchises 
expired.  It  was  further  pointed  out  that  the  rails  and  rolling  stock  wear 
out  and  have  to  he  replaced  or  renewed  at  certain  intervals,  and  that 
this,  too,  should  be  considered  a  charge  against  the  earnings. 

Depreciation  in  street  railroad  accounts. 

In  the  case  of  light,  heat  and  power  companies,  as  shown  in  the  sec- 
tion thereon,  the  Commission  found  that  the  engineers  and  accountants 
had,  to  some  extent,  agreed  upon  the  rate  of  depreciation  for  the  differ- 
ent items  of  property  used.  But  no  such  agreement  on  standard  tables 
of  depreciation  exists  for  street  railroad  properties.  An  examination 
of  the  standard  text-books  on  street  railroad  accounting  and  an  ex- 
tended inquiry  among  street  railroad  accountants  revealed  the  fact  that 
in  America  depreciation  is  not  usually  carried  as  a  regular  automatic 
account,  hut  is  "written  off*  at  apparently  arbitrary  amounts  by  order 
of  the  officers  or  directors  and  often  at  very  irregular  intervals. 

The  United  States  Censu-  bureau  has  this  to  say  of  depreciation: 

Oik-  <>f  the  mosl  important  points  i<>  '»■  borne  in  mind,  in  considering  capitalization 
< .  f  street  railway-  i-  the  cob1  involved  in  tin-  reconstruct  ion  which  has  been  necessitated 
by  progress  in  methods.  It  Is  a  Fact  sometimes  overlooked  that  the  trades  and  equip- 
ment <it'  the  old-fashioned  borse  railways  had  practically  to  he  thrown  away  w  ben  cable 
or  electric  traction  was  introduced,  an. I  that,  in  most  cases,  the  expense  of  the  new 
system  was  almo  eat  as  it  would  have  been  had  there  been  no  previous  railway 
w  hat  ever.  The  capitalization  of  the  different  kit  pis  of  Btreel  railways  in  L890  can  not  ho 
segregated  accurately,  but  it  i-  probable  that  the  lmr<e  lines  were  represented  by 
i  the  amount  of  fully  |260,000,000,  much  the  better  part  of  which  was  based 
on  property  that  ha-  since  beco valueh  - 

The  cable  railways  which  existed  in  1890  have  to  a  great  extent  been  changed  to  elec- 
tric operation,  this  being  true  even  of  two  or  three  important  cable  lines  completed 
Bince  L890,  A.  considerable  fraction  of  the  large  investment  in  cable  railways  lias  been 
destroyed  by  the  change.    The  power  houseB,  cables,  and  grips  have  been  virtually 


REPORT   OF   COMMISSION   ON  REVENUE   AND   TAXATION.  187 

thrown  away  on  the  scrap  heap;  the  subways  in  which  the  cables  ran,  the  cost  of  which 
was  very  great,  have  been  wholly  abandoned  in  many  instances;  while  in  other 
instances  the  expense  of  reconstructing  them  for  the  use  of  the  underground  electric 
trolley,  which  has  been  done  extensively  in  New  York  and  Washington,  is  much  greater 
than  is  ordinarily  supposed.  Mr.  B.  J.  Arnold,  in  his  report  to  the  Chicago  City 
Council, declared  that  it  would  cosl  marly  as  much  to  conver  the  cable  lines  of  that 
city  to  the  underground  trolley  system  as  to  construct  the  latter  at  first  hand.  The 
expense,  as  indicated  in  the  report,  would  depend  largely  upon  the  size  of  rails  and  the 
strength  of  conduit  yokes  used  under  the  cable  system.  If,  as  in  Chicago,  heavier 
construction  should  be  necessary  to  bear  the  strain  of  modern  cars  and  speed,  the  old 
work  would  be  of  little  value.  (Report  on  the  Chicago  Transportation  Problem,  1902, 
page  158.) 

Finally,  many  street  railway  companies  have,  even  within  the  short  time  since  elec- 
tric traction  was  introduced,  largely  reconstructed  their  plants  and  equipment.  The 
earlier  motors,  notwithstanding  their  high  cost,  proved  insufficient  in  power  and  unsat- 
isfactory in  other  ways.  They  have  for  the  most  part  been  replaced,  and  in  many 
instances  even  these  new  motors  have  again  been  replaced.  The  small  cars,  unsuited 
to  high  speed,  have  given  way  to  larger  ones.  The  foundations  of  the  roadbed  and  the 
tracks  have  had  to  be  reconstructed  and  strengthened  in  many  cases  to  meet  the  require- 
ments  of  larger  cars  and  increased  speed.  Even  more  conspicuous,  perhaps,  have  been 
the  replacements  of  the  engines  and  dynamos  in  the  power  houses. 

Changes  of  this  sort  result  in  greater  economy  of  operation,  and  are  usually  profitable 
to  the  railway  company  even  when  the  interest  on  the  new  investment  is  taken  into 
account ;  but  they  have  of  necessity  greatly  increased  the  aggregate  expenditure  for 
construction  and  equipment.  The  railways,  as  they  stand,  have  cost  much  more  than 
they  would  cost  if  constructed  de  novo  at  the  present  time. 

It  is  not  true,  however,  that  all  street  railways  have  been  thus  compelled  to  abandon 
or  reconstruct  properties  representing  large  investments  of  capital.  Most  of  the  fast 
interurban  railways  have  been  built  since  the  methods  of  construction  and  equipment 
were  highly  developed,  and  have  required  as  yet  little  reconstruction.  Many  railways 
in  the  smaller  towns  and  cities,  as  well  as  a  considerable  part  of  the  trackage  even  in 
large  municipalities,  date  likewise  from  a  recent  period.  In  fact,  as  appears  from 
Table  21,  the  capitalization  of  many  of  these  newer  systems  is  very  much  less  per  mile 
than  that  of  older  systems  in  large  cities.  No  opinion  is  here  expressed  as  to  whether 
the  present  capitalization  of  street  railways  generally,  or  of  any  particular  railway, 
corresponds  to  the  total  amount  of  money  which  has  been  actually  invested  in  its 
present  and  past  properties  taken  together.  Attention  is  merely  called  to  the  fact  that, 
taking  the  country  as  a  whole,  the  aggregate  waste  of  capital  involved  in  the  progress 
of  street  railway  methods  has  been  great.  That  waste  must  particularly  be  borne  in 
mind  in  considering  the  capitalization  of  many  individual  companies. 

The  question  at  once  occurs,  however,  to  what  extent  property  which  has  become 
valueless  should  continue  to  be  represented  by  securities  and  to  earn  interest  or  divi- 
dends. It  is  commonplace  in  accounting  that  a  certain  amount  should  be  charged 
annually  against  earnings,  to  cover,  not  merely  depreciation  arising  from  ordinary 
wear  and  tear,  but  also  the  probable  depreciation  arising  from  progres-  in  methods. 
Street  railway  companies  ought,  of  course,  to  be  permit  ted  to  charge  fares  high  enough  to 
provide  for  such  a  reasonable  depreciation  allowance.  Under  proper  accounting  the  net 
capitalisation  represented  by  depreciating  property  is  thus  gradually  reduced,  and  the 
amount  required  from  earnings  for  dividends  and  interest  is  correspondingly  lessened. 
Doubtless,  in  many  cases,  street  railways  have  in  the  past  earned  profits  high  enough 
to  enable  them  to  make  such  depreciation  allowances  if  they  had  seen  fit  to  do  so. 
Their  policy,  however,  almost  without  exception,  has  been  to  pay  out  the  greater  part 
of  net  income  in  dividends,  although  a  surplus  is  often  invested  in  the  construction  of 
extension-  to  old  lines.  Had  correct  accounting  methods  been  pursued,  the  capitalisa- 
tion of  many  horse  railway?-  would  have  been  completely  written  off  by  the  time  elec- 
tric traction  had  rendered  the  plants  valueless. 

During  the  years  since  electricity  was  introduced,  changes  in  methods  on  many  rail- 
way systems  have  been  .-o  rapid,  and  capital  has  been  expended  so  fast,  that  it  would 


1>>  REPORT  OF  COMMISSION   ON   REVENUE   AND   TAXATION. 

have  been  Impossible  to  make  a  depreciation  allowance  snfflcienl  to  write  off  the  waste 
capital  within  t  J  i « -  period  <>f  time  during  which  Li  existed,  without  practically  excluding 
the  possibility  of  interesl  and  dividends.  Moreover,  snfflcienl  experience  had  qoI  been 
accumulated,  at  least  during  the  earlier  years  of  electric  traction,  to  enable  accountants 
to  determine  what   would  be  a  reasonable  allowance  for  depreciation.     In  instances 

w  here  property  is  being  replaced  so  rapidly  it   seems   reasonable  thai    the  capitalization 

Bhould  he  temporarily  increased  beyond  the  Bums  which  would  be  accessary  to  con- 

struct  the  improved  railway  system  from  the  beginning.  But  it  Beems  equally  reason- 
able thai  such  capitalization,  in  excess  of  the  cost  of  reproducing  the  properties,  Bhould 
thereafter  be  reduced  as  rapidly  as  possible  by  the  accumulation  of  a  depreciation  fund. 
There  is  little  probability  that  such  sudden  and  greal  changes  in  methods  will  be  neces 
SBXy  in  the  future  as  in  the  immediate  past,  ami  it  will  he  possible  hereafter  to  estimate 
depreciation  better  and  to  provide  for  it.  Permanently  to  demand  interest  and  divi- 
dends "ii  securities  issued  for  properties  no  longer  in  existence  is  unjustifiable. 

In  Great  Britain  the  standard  form  for  a  tramway  (street  railroad) 
account  includes  a  regular  schedule  for  depreciation.  In  Lisle's  Ency- 
clopedia of  Accounting  is  an  article  by  Mr.  James  Dalrymple,  the  expert 
who  was  called  to  Chicago  by  Mayor  Dunn,  to  report  on  the  possibility 
of  municipal  ownership  of  street  railways  in  that  city.  He  has  the 
following  to  say  of  depreciation: 

There  is  a  considerable  difference  of  opinion  as  to  whether  a  corporation  is  called 
upon  to  provide  out  of  revenue,  annually  a  sufficient  sum  to  renew  the  machinery, 
plant,  and  equipment  at  the  end  of  its  estimated  life,  and,  in  addition,  to  provide  the 
statutory  sinking  fund;  or  whether  it  is  only  required  to  provide  the  sinking  fund. 
Many  corporations  simply  make  provision  for  the  sinking  fund;  others  only  provide 
for  the  depreciation  at  varying  percentages  on  the  original  capital  expenditure,  and, 
out  of  the  sum  thus  provided,  meet  the  annual  sinking  fund  charge;  a  few  corporations 
both  make  provision  for  the  annual  depreciation  on  the  machinery,  plant,  and  equip- 
ment, and  the  statutory  sinking  fund.  The  result  of  the  adoption  of  the  third  system 
is  that  the  tramway  debt,  at  the  end  of  the  sinking  fund  period,  will  be  entirely  paid 
off,  and  the  tramway  undertaking  will  be  in  perfect  condition,  or  there  will  be  funds 
available  to  put  it  into  perfect  condition. 

The  corporations  of  Ayr  and  Dundee  in  Scotland,  and  to  a  certain  extent  the  corpora- 
tion of  Rochdale  in  England,  are  required  by  Parliament  to  provide  annually,  in 
addition  to  the  sinking  fund,  a  depreciation  fund  on  their  tramway  machinery  and 
plant.  In  the  Scotch  acts  this  depreciation  has  to  be  calculated  at  the  rate  of  3%  per 
annum  on  the  first  cost  of  the  machinery  and  plant. 

Tin    schedule  of  depreciation  rates  suggested  by  Mr.  Dalrymple  is: 

Permanent   way 8.7  %  of  gross  expenditures. 

Electrical  equipment  of  line 3.0  %  of  gross  expenditures. 

Buildings  and  fixtures... 1.7  %  of  gross  expenditures. 

Workshop  tools  and  sundry  plant 0.35%  of  gross  expenditures. 

Cars 12.3  %  of  gross  expenditures. 

Electrical  equipment 2.3  %  of  gross  expenditures. 

Miscellaneous 0.28%  of  gross  expenditures. 

Total 18.6  %  of  gross  expenditures. 

Net  earnings  after  allowance  for  depreciation. 

We  found  the  gross  expenditures  exclusive  of  depreciation  to  average 
about  55%  of  the  gross  receipts.  Taking  Mr.  Dalrymple's  figures  for 
depreciation,  then,  118.6%  of  55  is  05.23,  leaving  the  net  revenues,  with 


REPORT   OF   COMMISSION   ON  REVENUE   AND   TAXATION.  189 

allowance  for  depreciation  at  the  above  rates,*  about  35%  of  the  gross 
receipts. 

This  agrees  substantially  with  the  conclusions  of  various  street  rail- 
way accountants  whose  opinions  have  been  presented  to  the  Commission. 
They  claim,  in  brief,  that  a  strict  accounting  of  all  the  actual  elements 
of  depreciation  by  itemized  schedules,  would  call  for  20%  of  the  gross 
receipts.  This,  however,  seems  so  high  that  they  are  generally  inclined 
to  admit  that  10%  is  an  amply  sufficient  allowance,  the  more  so  as  they 
claim  to  charge  to  maintenance  certain  items  which  might  possibly  be 
classified  as  depreciation. 

In  the  British  form  of  accounts  only  8.55%  of  the  total  expenditures 
is  for  "  maintenance,"  while  American  street  railroads  charge  20.2%  to 
that  account.  In  other  words,  the  British  accounts  charge  27%  to 
maintenance  and  depreciation,  while  the  American  accounts  charge 
20.2%  to  maintenance  and  make  no  charge  for  depreciation;  the  differ- 
ence is  a  trifle  less  than  7%. 

Increase  in  earnings  and  in  the  value  of  the  franchises. 

In  this  connection  it  should  be  pointed  out  that  the  steady  growth  in 
the  earnings  of  the  street  railroads,  which  comes  with  the  growth  of  the 
cities  they  serve,  causes  an  "  appreciation  "  in  the  value  of  the  fran- 
chises up  to  a  certain  period  in  the  life  of  the  franchises,  which  to  some 
extent  offsets  the  depreciation  above  referred  to.  A  street  railroad  can, 
ordinarily,  without  any  very  great  additional  outlay  on  its  equipment, 
take  care  of  a  large  amount  more  traffic  than  it  had  at  the  start,  and  if 
such  a  growth  comes  within  the  period  of  the  life  of  its  franchise,  it 
has  a  fund  out  of  which  to  pay  for  depreciation. 

Upon  the  effect  of  the  steady  increase  in  revenues  from  year  to  year 
and  the  consequent  appreciation  of  the  value  of  the  franchises,  the 
Census  Bureau  has  these  pertinent  statements: 

From  the  standpoint  of  the  investors  it  is  sometimes  considered  preferable  not  to 
provide  depreciation  and  sinking  funds  in  the  case  of  a  street  railway  company  that 
possesses  an  unlimited  franchise  and  that  operates  in  a  city  with  a  large  and  steadily 
increasing  population.  The  investors  in  such  case  know  that  the  value  of  their  fran- 
chise is  steadily  appreciating  and  that  the  appreciation  tends  to  offset  any  depreciation 
in  the  physical  properties.  They  feel  assured  that  the  bonds  of  the  company  a-  they 
fall  due  can  !»■  renewed  with  little  difliculty  ami  possibly  at  a  lower  rate  of  interest. 
It  may  therefore  he  deemed  wise  policy  to  provide  the  capital  necessary  for  renewals 
and  replacements  by  the  issue  of  additional  securities  rather  than  by  appropriating 
part  of   the  earnings  for  depreciation. 

These  considerations,  however,  apply  with  much  less  force  in  the  case  of  many  rail- 
ways which  are  not  so  favorably  situated  or  are  of  less  modern  construction,  as  the 
present  properties  held  by  them  may  depreciate  greatly  in  value.  In  some  cases  a  large 
part  of  the  investment  has  been  made  by  the  issue  of  bonds,  and  when  these  fall  due 
they  may  be  more  than  equal  to  the  value  of  the  depreciated  plant.  Under  such  cir- 
cumstances sound  finance  would  Beem  to  demand  Binking  and  depreciation  funds. 
This  is  still  more  conspicuously  true  of  th08e  companies  whose  franchises  are  limited  to 


190  REPORT  OF   COMMISSION   ON    REVEN1  E   AND   TAXATION. 

a  term  ol  y< [ally  if  there  be  do  pro\  ision  in  the  franchise  for  compensation  to 

the  present  holders  tor  the  value  of  their  tangible  properties.  Delegates  to  the  American 
Street  Railway  Accountants'  Association  have  frequently  emphasized  the  desirability 
of  sinking  and  depreciation  funds. 

Earnings  per  mile  of  road. 

In  street  railroad  accounts  the  earnings  per  mile  of  road  seem  to  play 
a  far  Lose  important  part  than  they  do  in  steam  railroad  accounts.  But 
they  afford  a  rough  method  of  comparing  the  two. 

The  following  figures  apply  to  the  year  1902: 

Gross  earnings  per  mile,  Bteam  railroads  United  Btatea  at  large $8,625 

Gross  earnings  per  mile,  Btreet  railroads  United  States  at  large 11,152 

Excess  for  street  railroads --- $2,527        '-"'.3% 

Net  earnings  per  mile,  steam  railroads  United  Btatea  al  large $3,048       35."'. i 

arninga  per  mile,  street  railroads,  United  States  at  large 4.741        42.5% 

Excess  for  street  railroads -  — $1,693        55.5% 

In  short,  street  railroad  earnings  per  mile  of  road  are  29.3%  larger 
than  those  of  steam  railroads,  and  their  net  earnings  per  mile,  without 
allowance  for  depreciation,  are  55.5%  larger. 

But  the  gross  earnings  per  mile  vary  so  much  from  road  to  road  that 
they  are  of  very  little  assistance  in  devising  a  tax  system.  The  range 
in  California  is  from  $3,000  to  $38,000  per  mile. 

Taxes  now  paid. 

The  taxes  paid  in  1905  by  California  street  railroads  averaged  4.01% 
of  their  gross  earnings.  There  is  a  great  variation  in  the  rates  paid 
from  road  to  road.  The  range  is  from  about  2%  to  5f%.  The  percentage 
of  taxes  paid  to  gross  earnings  tends  to  diminish  from  year  to  year. 
This  Is  to  be  expected  under  the  general  property  tax,  as  the  assessment 
based  on  property  is  not  likely  to  advance  as  rapidly  as  the  earnings. 

Taxation  of  street  railway  companies  in  different  states. 

CoNNECTictT.     The  same  as  other  railroads  (see  chapter  on  railroads),  1%  on  stoek  and 

bond  values. 

District  of  Columbia.    4    on  gross  earnings. 

Mmnk.  On  their  gross  receipts:  if  $1,000  or  less  per  mile,  three  twentieths  of  1% ; 
if  over,  for  every  Increase  of  $1,000  per  mile  or  part  thereof,  three  twentieths  of  1% 

additional. 

Massachusetts.    Covered  by  the  general  corporation  tax.    (See  chapter  on  railroads.) 
Xkw  JbbsKY.     -'     on  grosa  receipts,  in  addition  to  other  taxes. 

Ni.u  Y.o:k.  In  addition  to  other  taxes,  3%  of  the  dividends  in  excess  of  1  of  the 
capital -tock  and  l     on  gross  earnings. 

Ohio.    One  hallo!  l  |  on  gross  earnings,  in  addition  to  other  taxes. 

Pi  w- y-v  \  m  \.    8 mills  on  the  dollar  of  gross  receipts,  in  addition  to  other  taxes. 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  191 

Rhoi.k  [bland.  1  on  the  gross  earnings,  and  if  the  dividends  exceed  8%,  the  amount 
of  such  excess. 

Wisconsin.  On  the  gross  earnings.  When  the  gross  earnings  are  less  than  $800,000 
per  annum,  UJ0  on  the  first  (250,000,  and  24%  on  all  amounts  above  that;  when  the  gross 
receipts  equal' $800,000  per  annum,  3%  on  the  first  $800,000  and  4%  on  all  amounts  above 
that. 

In  most  other  states  the  tax  is  like  our  old  one;  that  is,  on  the  property  as  valued 
by  local  assessors. 

Conclusions  as  to  the  tax  rate  for  street  railroads. 

After  carefully  considering  all  the  arguments  in  regard  to  deprecia- 
tion, and  weighing  all  other  facts  concerning  the  earnings  of  street 
railroads,  the  Commission  reached  the  conclusion  that  there  was  very- 
little,  if  any,  difference  on  the  average  between  street  railroads  as  to  the 
proportion  of  net  to  gross  earnings.  The  steam  roads  regularly  charge 
to  maintenance  any  "replacements,"  etc.,  due  to  depreciation,  and 
charge  betterments  to  capital  where  they  are  taken  care  of  by  the 
increase  in  earnings.  The  franchises  of  steam  roads  are  practically  per- 
petual, so  that  they  do  not  have  to  face  the  extinction  of  the  "investment" 
by  the  lapse  of  the  franchise,  as  do  street  railroads.  In  view  especially 
of  the  fact  that  street  railroads  enjoy  only  terminable  franchises,  and 
in  view  of  the  other  elements  of  depreciation  not  included  in  the  figures 
used  above  in  reaching  the  average  of  43%  net  to  gross  earnings,  it  seems 
but  .proper  to  allow  6%  or  7%  of  the  gross  earnings  per  annum  for 
depreciation.  Taking  into  consideration  all  the  differences  in  the  meth- 
ods of  accounting,  7%  would  be  the  equivalent  on  the  average  of  what 
the  British  street  railroads  do,  and  American  railroads  do  not  regularly 
charge  to  depreciation.  Seven  from  forty-three  leaves  thirty-six  per 
cent  of  net  to  gross  as  the  typical  or  average  percentage  for  street  rail- 
roads. This  is  substantially  the  same  as  for  steam  railroads,  and  sup- 
ports the  conclusion  that  street  railroads  should  pay  at  the  same  rate 
as  other  railroads. 

Recapitulation  and  recommendations. 

The  Commission  finds  that  the  street  railroads  and  the  steam  railroads 
can  be  distinguished  one  from  the  other  for  purposes  of  taxation  only 
with  the  greatest  of  difficulty.  Any  distinctive  definitions  which  might 
be  written  would  be  so  involved  as  to  invite  litigation,  the  outcome  of 
which  would  he  extremely  problematical.  Furthermore,  when  due 
allowance  is  made  for  depreciation,  there  is  no  marked  difference 
between  the  street  and  the  steam  railroads  as  to  the  proportion  of  net 
earnings  to  gross  earnings  which  would  require  a  distinction  to  be  made 
in  the  rates.  The  typical  or  average  street  railroad  earns  about  the 
same  proportion  net  as  do  the  steam  roads.  It  is,  therefore,  recom- 
mended that  street  railroads  be  treated  precisely  as  are  other  railroads 
in  all  matters  relating  to  taxation. 


192  REPOKT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 

The  annual  contract  payments  for  the  franchises. 

It  should  be  noted  that  for  reasons  stated  in  the  Preliminary  Report 
which  are  quoted  above,  and  more  fully  set  forth  in  Chapter  III,  Part  III 
of  this  Report,  the  Commission  regards  as  utterly  absurd  the  claim  that 
the  payments  required  to  be  made  to  cities  under  the  Broughton  Act 
(namely,  2%  of  the  gross  earnings),  or  under  any  similar  contract  pay- 
ments, are  taxes.  They  are  not  taxes,  nor  even  operating  expenses, 
and  no  deduction  from  either  taxes  or  net  earnings  can  be  allowed  on 
account  of  such  payments. 

The  fear  has  been  expressed  that,  if  cities  are  allowed  (as  this  is 
speciously  but  erroneously  called)  "to  tax"  the  franchises  and  the 
State  again  taxes  all  earnings,  the  companies  may  be  crushed  between 
the  two  authorities.  This  fear  is  groundless  and  absurd.  When  a 
company  acquires  a  franchise— so  runs  the  Broughton  Act  and  so  run 
city  charters  containing  analogous  provisions — it  must  pay  for  it,  among 
other  things,  at  least  2%  (or  in  some  cities  more)  of  its  gross  earnings, 
after  a  certain  period  of  time  from  granting  the  franchise.  This  is  part 
of  the  purchase  price  of  the  franchise.  It  is  a  fixed  contract  payment, 
and  can  not  be  changed  after  the  franchise  is  granted.  Every  company 
obtaining  such  a  franchise  knows  im  advance  how  much  it  will  have  to 
pay  for  it  to  the  city.  Under  the  plan  of  the  Commission  it  could  also 
compute  in  advance  how  much  its  taxes  would  be,  which  is  not  the  case 
under  the  present  system.  Under  the  present  system  of  taxation, 
which  places  unlimited  power  of  taxation  in  the  hands  of  the  assessor 
and  the  supervisors,  a  company  might  conceivably  be  "crushed  between 
the  upper  and  the  nether  millstone."  Under  the  proposed  system  this 
would  be  utterly  impossible. 


SECTION  2. 

THE  TAXATION  Of  EXPRESS  COMPANIES. 


Definition. 

What  constitutes  an  express  company  in  the  sense  in  which  it  is  used 
here  is  best  defined  in  the  terms  of  the  statutes  of  Maine,  which  provide: 
"  Every  corporation,  company,  or  person  doing  express  business  on  any 
railroad,  steamboat,  or  vessel  in  the  State,  shall,  annually  before  the 
first  day  of  May,  apply  to  the  treasurer  of  state  for  a  license  authoriz- 
ing the  carrying  on  of  said  business;  and  any  such  corporation, 
company,  or  person,  neglecting  to  make  application  for  a  license  as 
aforesaid,  forfeits  fifty  dollars,  to  be  recovered  by  action  of  debt  in  the 
name  of  the  State;  every  such  corporation,  company,  or  person  shall 


REPORT   OF    COMMISSION   ON   REVENUE   AND   TAXATION. 


193 


annually  pay  to  the  treasurer  of  state  two  per  cent  of  the  gross  receipts 
of  said  business  for  the  year  ending  on  the  first  day  of  April  preceding. 
Said  two  per  cent  shall  be  on  all  said  business  done  in  the  State,  includ- 
ing a  proportional  part  on  all  express  business  coming  from  other  states 
or  countries  into  this  State,  and  on  all  going  from  this  State  to  other 
states  or  countries;  provided,  however,  that  nothing  herein  applies  to 
goods  or  merchandise  in  transit  through  the  State." 

This  definition  excludes  the  teamsters  and  local  "express-men," 
so  called,  who  receive  and  deliver  baggage,  packages,  and  the  like  within 
the  confines  of  a  single  town  or  city. 

Taxes  now  paid. 

The  assessors'  returns  show  that  express  companies  were  assessed  in 
1905  for  $736,807  and  paid  taxes  amounting  to  $14,759.28.  The  asses- 
sors were  asked  to  report  the  assessment  of  and  taxes  paid  by  all 
express  companies  in  the  sense  above  defined.  It  appears,  however, 
that  some  of  the  smaller  companies  were  omitted,  and  that  by  far  the 
greater  part  of  the  above  assessment  and  taxes  is  that  of  Wells,  Fargo 
&  Co.  That  company  reports  its  State,  county,  and  city  taxes  in  Cali- 
fornia, exclusive  of  license,  as  $12,934.  It  appears,  therefore,  that  of 
the  above  total  taxes  reported  by  the  assessor  only  $1,825  was  paid  by 
express  companies  other  than  Wells,  Fargo  &  Co. 


License  taxes. 

The  following   licenses 
cities : 

Alameda $10  00 

Emeryville  .. 1  50 

Hayward  . 12  00 

Livermore 12  00 

Oakland 51  00 

Pleasanton 8  00 

Jackson 80  00 

Antioch 6  00 

Colusa  „ 20  00 

Selma 24  00 

Fresno —  60  00 

Eureka 40  00 

Los   Angeles... 60  00 


are  charged  express  companies  in  various 


Sausalito $8  00 

Mill  Valley 12  00 

Monterey 16  00 

Pacific  Grove  ....     20  00 

Salinas 124  00 

Napa.. 40  00 

Auburn 32  00 

Corona 12  00 

Sacramento 160  00 

Hollister 10  00 

Redlands 20  00 

San  Francisco 530  00 


San  Luis  Obispo $40  00 

San  Mateo 21  00 

Redwood 110  00 

Lompoc. 12  00 

Gilroy 30  00 

San  Jos6 120  00 

Santa  Clara 8  00 

Watson  ville 40  00 

Dixon 16  00 

Vacaville 20  00 

Red  Bluff. 30  00 

Winters 12  00 


Inadequacy  of  the  property  tax  as  applied  to  express  companies. 

The  inadequacy  of  the  property  tax  when  applied  to  express  com- 
panies has  been  strikingly  pointed  out  by  the  Supreme  Court  of  the 
United  States.  In  the  so-called  Ohio  Express  Company  cases  (see 
Adams  Express  Co.  vs.  Ohio,  165  U.  S.  194)  the  court  said  that  it  was 
"unity  of  use"  which  enabled  $2-3,400  worth  of  horses,  wagons,  safes, 
and  so  on,  in  the  Stair  to  produce  $275,446  in  a  single  year.  What  the 
13— RT 


1H4  REPORT  OP   COMMISSION   ON    REVENUE  AND   TAXATION. 

court  meant  by  "unity  of  use"  is  more  fully  explained  in  the  language 
of  Chief  Justice  Fuller  (pages  221  and  222  of  the  above  case): 

No  more  reason  i-  perceived  for  limiting   t  lie  valuation  of  express  companies   to 

hones,  wagons, and  furniture,  than  thai  of  railroad,  telegraph,  an. 1  sleeping-car  com- 
panies to  roadbed,  rails,  and  ties;  poles  and  wires;  or  cars.  The  anil  Is  a  unit  of  use 
and  management;  and  the  horses,  wagons,  safes,  poaches,  and  furniture:  the  contracts 
for  transportation  facilities;  the  capita)  necessary  to  carry  on  the  business,  whether 
represented  in  tangible  or  intangible  property,  in  Ohio,  possessed  a  value  in  combina- 
tion and  from  use  in  connection  with  the  properly  and  capital  elsewhere,  which  could 
as  rightfully  be  recognized  in  the  assessment  for  taxation  in  the  instance  of  these 
companies  as  the  others. 

The  gross  earnings  tax. 

The  propriety  of  a  gross  earnings  tax  in  this  case  is  so  obvious  that 
it  requires  no  argument  or  demonstration.  All  the  states  which  have 
departed  from  the.crude  general  property  tax  for  express  companies, 
and  they  are  twenty-eight  in  number,  with  two  exceptions,  apply  either 
the  gross  earnings  tax  or  a  license  tax,  nineteen  apply  the  gross  earnings 
tax,  and  in  several  other  cases  the  license  tax  is  graduated  according  to 
gross  earnings. 

Taxation  of  express  companies  in  different  states. 

Rates  are  all  per  annum. 

Alabamv.  When  doing  business  between  points  wholly  in  the  State,  a  license  or 
privilege  tax  of  $4,000. 

Connecticut.  A  tax  of  5%  upon  the  gross  receipts  in  the  State,  in  lieu  of  all  other 
taxes. 

Delaware.     A  tax  of  5%  on  gross  earnings  in  the  State. 

Florida.    Southern  Express  Company,  $2,500  per  annum. 

Georgia.  Express  companies  are  assessed  upon  their  property,  but  if  the  taxes  as 
tbus  assessed  do  not  amount  to  2i%  of  the  gross  earnings  they  are  required  to  pay  that 
amount  on  gross  earnings. 

LOUISIANA.  In  ten  classes  according  to  gross  annual  earnings;  the  lowest  class  is  all 
Onder  $26,000,  and  the  highest  $;>ui i.ni id  or  more.  The  rates  range  from  $.".n  to  .Siou.  and 
are  $1.2n  per  $1,000  for  the  lowest,  and  80  cents  per  $1,000  for  the  highest;  also  $10  on 
each  $1,000  of  gross  receipts. 

M  sink.  A  tax  of  2%  on  the  gross  receipts  from  business  done  in  the  State,  which 
includes  a  proportional  part  of  all  express  coming  into  or  going  out  of  the  State,  but 
not  good,-  in  transit  through  the  State. 

M  \ i : y i .  \nk  2  of  gross  receipts  on  business  done  in  the  State  ;  in  addition  to  this,  the 
share-  of  Stock  are  taxed  as  property. 

Ma---'  in  setts.    Covered  by  the  general  corporation  tax,  and  assessed  upon  the  market 

value  of  the  shares  of  capital  stock;  the  rate  is  the  average  rate  of  the  general  property 

la*  throughout  the  State. 

Minnow.  Express  companies  until  L899paid  l  on  their  gross  receipts  in  the  State. 
From  1898  to  1901,  5    j  and  Bince  1901,  taxed  on  their  property. 

Minm  -ipta.  i'.;^  on  gross  earnings  from  business  in  the  State,  less  amount  paid  trans- 
portation companies,  in  lien  of  all  taxes  except  taxis  on  real  estate. 

Missouri.    l$%  on  gross  earnings;  in  addition  to  taxes  on  property. 

N'kw  Jbbsbt.     2%  on  gross  earnings;  in  addition  to  local  taxes  on  properly. 


REPORT   OF    COMMISSION   ON   REVENUE   AND   TAXATION.  195 

New  Mexico.     2%  on  gross  receipts  on  business  done  within  the  8tate. 
New  York.     An  annual  franchise  tax  based  on  the  amount  of  capital  stock  employed 
in  the  State,  at  the  rate  of  one  fourth  of  a  mill  for  each  1%  of  dividends  declared  during 
the  year;  also,  five  tenths  of  1%  of  the  gross  earnings. 

North  Carolina.  An  annual  franchise  tax  on  capital  stock  at  rates  ranging  from  $5 
to  $500  in  seven  classes.  The  rates  are  approximately  one  half  of  1%  and  a  license  tax  of 
2%  on  gross  receipts  within  the  State,  but  if  one  fourth  of  the  assets  are  invested  and 
taxable  in  the  State  the  rate  is  1£%;  if  one  half  the  assets  are  invested  and  taxable  in 
the  State  the  rate  is  1%;  and  if  three  fourths,  the  rate  is  one  half  of  1%;  in  addition  to 
taxes  on  property. 

North  Dakota.     In  addition  to  the  taxes  on  the  property  a  license  tax  of  $5  for  each 

station,  city,  or  village  having  200  or  less  inhabitants;  $10  for  stations  and  cities  of 

between  200  and  1,000,  and  $25  for  those  of  from  1,000  to  3,000,  and  $50  for  those  over  3,000. 

Ohio.    2%  on  gross  earnings,  less  what  is  paid  for  transportation  of  freight ;  in  addition 

to  taxes  on  property. 

Oregon.    3%  on  the  gross  receipts  within  the  State. 

Pennsylvania.  On  capital  stock,  5  mills  per  $1;  on  interest  paid  on  loans,  4  mills; 
on  gross  earnings,  8  mills;  in  addition  to  local  taxes  on  property. 

Rhode  Island.  1%  on  the  gross  receipts  derived  on  the  business  transacted  in  the 
State,  in  lieu  of  all  other  taxes  except  those  on  real  estate. 

Texas.     1^%  on  gross  receipts  within  the  State;  after  1906  to  be  2%. 
Tennessee.     Express  companies,  for  lines  of  less  than  100  miles,  $500;  for  more  than 
100  miles,  $2,000;  in  addition  to  taxes  on  property. 

Vermont.    4%  on  gross  receipts  from  business  done  in  the  State. 

Virginia.  Express  companies,  in  addition  to  taxes  on  property,  pay  for  the  privilege 
of  doing  business  between  points  within  the  State  where  the  mileage  is  200  miles  or  less, 
$250:  200  to  1,000  miles,  $1,250;  1,000  to  1,500  miles,  $2,000;  1,500  or  over,  $2,750. 

West  Virginia.  Foreign  express  companies,  $1.50  per  mile  of  road  over  which 
expressage  is  carried,  in  addition  to  taxes  on  property.  All  domestic  companies  pay  an 
annual  franchise  tax  at  graduated  rates. 

Wisconsin.  Are  taxed  on  that  portion  of  their  capital  stock,  estimated  at  its  market 
value,  which  the  business  done  in  the  State  bears  to  the  entire  business  of  such  com- 
pany, with  a  deduction  for  the  value  of  real  estate  assessed  outside  the  State;  in  lieu  of 
all  other  taxes. 

Wyoming.     1%  on  gross  earnings,  in  addition  to  the  general  property  tax. 


The  rate  for  the  tax  on  gross  earnings. 

From  careful  inquiry  and  investigation  the  Commission  is  satisfied 
that  the  net  earnings  of  express  companies  are  from  15%  upward  of  the 
gross  earnings.  In  the  Preliminary  Report  this  was  capitalized  at  6%, 
and  a  rate  of  2^%  suggested  as  the  fair  tax  rate.  Upon  further  consider- 
ation, however,  the  Commission  decided  that  this  rate  was  too  low. 
Wells,  Fargo  &  Co.,  according  to  reports  published  in  the  commercial 
journals,  pays  8%  per  annum  and  its  stock  sells  at  200  and  over.  It  is, 
therefore,  capitalized  at  4%.  The  other  express  companies  make  larger 
net  earnings.  Everything  considered,  a  tax  rate  of  3%  on  gross  earn- 
ings seems  adequate  and  fair. 


l:il,  REPORT   OF   COMMISSION  ON   RKVKNl  I.    AND   TAXATION. 

SECTION  3. 

TAXATION  Of  CAR   COMPANIES. 


The  present  system. 

Tlic  taxation  of  companieB  operating  their  own  cars  over  the  rail- 
roads of  the  State  is  in  an  especially  unsatisfactory  condition.  Except 
in  the  case  of  the  Pullman  Company,  which  is  assessed  hy  the  State 
Board  of  Equalization,  on  the  basis  of  the  average  number  of  cars 
which  it  operates  in  the  State  during  tin- year,  the  only  taxes  levied 

are  those  assessed  by  the  county  a rs  on  such  cars  as  happen  to  be 

found  in  the  State  on  the  first  Monday  in  March.  This,  in  Bpite  of  the 
fact  that  a  considerable  number  of  such  cars  find  their  way  into  the 
State  during  the  year,  amounts  in  actual  practice  to  the  taxation  of 
those  cars  only  which  are  owned  or  operated  in  California  by  some 
Local  company  or  agency,  and  a  few  scattering  cars  of  other  Lines. 

The  total  assessed  valuation  of  car  companies  of  all  sorts  in  1905  was 
.,'.»M.  1>">,  and  the  taxes  paid  amounted  to  $18,831.17.  Of  this  amount 
the  Pullman  Company  paid  $10,528.85. 

The  following  table  shows  the  assessment  of  the  car  companies  in 

1905: 

Table  of  Car  Company  Valuations. 

\-M>ssed 
Valuation. 

Pullman  Company - --- - $500,000 

American  Fast  Freighl  Line - --  :;m 

Anheuser-Busch  Brewing  Company     ''JOO 

Armour  Packing  Company - - Ml" 

Kansas  City  Fruit  Express --- '"', 

American  Palace  Horse  Car  Company - 8,400 

GhlesBenkamp  Carriage  Line - ■■'-' 5 

[ndependenl  Oi]  Refrigerator  Company 600 

Live  Poultry  Transportation  Company  -- L.200 

Merchants'  Despatch  and  Transportation  Company  — >u" 

Milwaukee  Refrigerating  Transit  Company i-'->m 

Swift  Refrigerating  Company 800 

Union  Refrigerating  Transportation  Company  ---  1:;m 

s.-m  Francisco  Breweries  Limited —  6,400 

San  Francisco  Refrigerating  Despatch  Company  82,475 

DmonTank     - --- •- - •'"'•"" 

Associated  Oil  Company -- 18,500 

Mission  Transportation  and  Refrigerating  Company - 172,85 

Continental  Fruit  Express - - 35,125 

Fruit  Growers'  Express - — 98,826 

American  H            ating  Transit  Company - iMOO 

Milwaukee  Refrigerating  'transit  Company —  :;"" 

Swift  Refrigerating  Car  Line - L,60D 

\\ .  stern  Stable  Car  Line.. —  ■"" 

Puenta  Oil  Company 1,000 

Total - 1881,486 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  197 

Earnings  of  car  companies. 

As  to  the  earnings  of  these  companies  very  little  original  information 
is  available.  The  Pullman  Company  positively  declared  itself  unable 
to  furnish  a  statement  of  its  earnings  in  California,  as  its  accounts  are 
not  kept  with  reference  to  State  boundary  lines.  It  has  never  rendered 
such  an  account  to  the  State  Board  of  Equalization.  The  other  com- 
panies make  the  same  plea. 

The  best  information  as  to  the  earnings  of  car  companies,  other  than 
the  Pullman  Company,  is  that  given  in  the  Report  of  the  U.  S.  Com- 
missioner of  Corporations  on  the  Beef  Industry,  House  Document  No. 
382,  58th  Congress,  3d  Session. 

The  summary  of  the  conclusions  as  to  earnings  (see  page  281)  was 
that  the  gross  earnings  per  annum  were  from  $200  to  $240  per  car,  and 
that  the  net  earnings  per  annum,  with  due  allowance  for  depreciation, 
varied  from  $75  to  $150  per  car.  At  the  lowest  rates  this  makes  the 
net  earnings  about  37^%  of  the  gross;  at  the  highest  rates,  62f%. 
From  this  information  it  appears  that  the  car  companies  engaged  in 
the  various  lines  of  freight  business  earn  about  45%  net  per  annum  and 
should  pay  at  the  rate  of  about  7%  per  annum  on  their  gross  earnings, 
if  the  tax  on  gross  earnings  is  to  equal  1%  on  the  value  of  the  property. 

The  Pullman  Company  reports  to  the  State  Board  of  Equalization 
the  average  number  of  cars  in  the  State  each  year.  This  average  is 
determined  by  taking  the  total  number  of  cars  on  each  "line'*  running 
regularly  into  California  and  assigning  to  California  that  proportion 
which  the  mileage  of  these  cars  bears  to  the  total  mileage  over  which 
they  ply.  Thus  if  there  are  five  trains  with  three  Pullman  cars  in  each 
running  continuously  each  way  between  some  California  point  and 
Chicago  over  a  certain  route  or  "line,"  it  takes  30  cars  to  "  fill  the  line," 
and  if  one  fifth  of  the  mileage  is  in  California  her  share  of  those  cars 
would  be  one  fifth  of  30,  or  6.  If  some  of  the  cars  are  run  only  part  of 
the  year,  say  three  months,  or  one  fourth  of  a  year,  they  count  only  as 
one  fourth  each.  This  method  takes  no  account  of  special  or  extra  cars 
and  cuts  out  all  time  spent  between  trips  or  in  shops  or  under  repairs. 
It  take-  into  account  only  the  regular  cars  running  continuously.  In 
this  way  in  1905  the  Pullman  Company  reported  61.979  standard  cars 
and  37.(')40  tourist  cars  as  California's  share.*  It  values  the  standard 
cars  at  $5,000  each  and  the  tourist  cars  at  $1,250  each,  making  a  total 
of  $356,945.  This  covers  only  the  value  of  tin  physical  property.  To  this 
the  State  Board  of  Equalization  added  $143,065,  presumably  for  the 
franchise,  hut  possibly  to  cover  the  amount  by  which  the  cars  were 
undervalued,  making  the  total  assessment  $500,000. 

*This  i>  a  total  of  less  than  100  cars  for  California.  In  a  recent  interview  given  to  a 
Los  Angeles  paper  one  of  the  officers  of  the  company  stated  that  "  60%  of  the  5, 000  cars 
owned  by  the  Pullman  Company  are  used  to  carry  passengers  to  and  from  California." 


l'.IS  REPORT   OF   COMMISSION   ON    REVENUE   AND   TAXATION. 

In  the  absence  of  any  statement  from  the  Pullman  Company  as  to  its 
earnings,  although  such  a  statement  was  repeatedly  requested,  we  are 
forced  to  make  our  own  estimate.  The  cars  on  the  "overland  limited" 
make  the  trip  to  and  from  Chicago  in  "less  than  three  days."  or  an 
average  of  800  miles  a  day.  Time  lost  between  trains  is  excluded  by 
the  method  by  which  the  average  number  of  cars  is  struck.  Cars  in 
other  trains  make  less  daily  mileage,  those  on  the  five-day  trains  making 
a  little  less  than  500  miles  per  day.  Cars  operated  entirely  between 
California  points  probably  make  even  less  mileage  per  day.  It  is  very 
conservative  to  assume  that  the  average  daily  mileage  for  standard  cars 
is  over  400  miles,  and  that  of  the  tourist  cars  over  300  miles.  The  U.  S. 
Bureau  of  Corporations,  in  the  report  above  referred  to,  quotes  Mr. 
George  C.  Wilson,  representing  the  Armour  Car  Lines  and  the  Con- 
tinental Fruit  Express,  as  saying  that  a  large  percentage  of  their  cars 
made  o50  to  400  miles  a  day — this  allowing  for  delayed  trains.  Cer- 
tainly the  Pullman  ears  running  in  passenger  trains  make,  on  the 
average,  better  time  and  more  mileage  than  any  freight  ears.  It  is 
further  conservative  to  assume  that  the  cars  are  run  nearly  half 
filled,  for  the  obvious  reason  that  if  not  the  company  would  run  fewer 
cars.  This  would  give  as  a  very  conservative  average  at  least  12  pas- 
sengers to  each  standard  car.  The  Pullman  Company  receives  from  the 
railroads  one  cent  a  mile  for  the  use  of  the  cars  and  charges  each  pas- 
senger an  average  of  about  \  cent  a  mile  in  standard  cars  and  about 
i  cent  a  mile  in  tourist  cars.  This  makes  the  average  mileage  earning 
per  standard  car,  counting  12  passengers  only,  about  7  cents,  and  for 
tourist  cars,  at  16  passengers,  5  cents. 

The  following  figures,  based  upon  the  foregoing,  give  a  very  conserva- 
tive estimate,  probably  far  below  the  truth,  of  the  gross  earnings  of  the 
Pullman  Company,  in  1905: 

Rough  Estimate  of  the  Gross  Earnings  of  the  Pullman  Company  in  California. 

62  standard  cars,  400  miles  per  day,  366  'lays,  at   7  cents  per  mile,  earn  per 

annum. - - -  *.;:i:;.iun  no 

38  tourisl  cars,  SCO  miles  per  day,  366  days,  al  6  cents  per  mile,  earn  per 

annum  * - 208,050  00 

rota] - -  $841,690  00 

In  L906  the  gross  earnings  were,  by  the  same  thod     $1,012,875  00 

Tli.it  the  above  ie  very  conservative  and  probably  far  in-low  the 
truth  is  seen  from  the  fact  that  it  allows  only  $28  a  day  per  standard 
car.  and  $15  per  day  mr  tourist  ears. 

The  Pullman  Company,  although  repeatedly  asked  to  do  so,  failed  to 
furnish  this  Commission  with  a  statement  of  its  gross  and  net  earnings. 
The  following  figures  were  obtained  from  the  newspapers: 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  199 

Income  Account,  Pullman  Company. 

Total  revenue  . ---- -  -,-     --           $29,588,642 

Expenses  of  operation $15,344, 141 

Depreciation   on   cars    and    reserve    for    depreciation   on    all 

property - 2,609,422 

Dividends  declared - - 5,919,984 

Proportion  of  net  earnings  of  cars  paid  associated  interests.--  744,421 

Netsurplus $4,970,074 

Surplus  brought  forward 22,151,946 

Surplus - - ----- $27,122,020 

According  to  this  showing  the  net  earnings  are  36%  of  the  gross 
earnings,  the  same  as  for  steam  railroads. 

At  4%  of  the  gross  earnings  the  Pullman  Company  would  pay  the 
State  at  least  $40,000  per  annum,  or  fully  threefold  the  taxes  actually 
paid. 

Taxation  of  car  companies  in  other  states. 

Few  of  the  states  make  a  success  of  the  taxation  of  this  class  of 
companies.  It  is  probable  that  New  York,  Massachusetts,  and  Penn- 
sylvania, which  include  these  companies  in  their  general  corporation 
taxes,  are  most  successful,  but  the  published  accounts  do  not  show  the 
returns  for  all  companies. 

The  states  which  levy  on  gross  earnings  base  the  rate  on  earnings 
made  on  business  beginning  and  ending  in  the  State.  The  rates  are  as 
follows:  Florida,  £%;  Georgia,  2*%;  Maine,  4%;  Maryland,  2%;  Min- 
nesota, 3%;  New  Jersey,  2%;  New  York,  in  addition  to  other  taxes,  1%; 
Texas,  24%;  Vermont,  5%.  The  returns  in  Texas  amount  to  $7,229.65 
from  sleeping  car  companies  only;  those  in  all  other  states  are  smaller. 

The  constitutionality  of  a  gross  earnings  tax. 

These  companies  are  all  engaged  in  interstate  business.  The  consti- 
tutional restrictions  are  precisely  the  same  as  those  which  apply  to  the 
taxation  of  railroads.     (See  chapter  on  railroads.) 

Objections  raised  by  the  Pullman  Company. 

In  long  oral  arguments  presented  by  the  attorneys  for  the  Pullman 
Company  before  the  Commission,  in  lieu  of  the  statement  concerning 
earnings  requested  of  the  company,  and  in  letters  addressed  to  the  Com- 
mission, that  company  objected  strongly  to  any  tax  measured  by  the 
gross  earnings. 

The  objections  raised  were  three  in  number.  In  the  first  place  it  was 
urged  that  the  earnings  of  the  company  from  interstate  business  could 
not  be  taxed.  When,  however,  it  was  pointed  out  that  the  tax  was  to 
be  a  tax  on  the  property  and  franchises  of  the  company  in  an  amount 


200  BEPOBT   OF   COMMISSION   ON   REVENUE  AND   TAXATION. 

to  be  measured  by  the  gross  earninge  and  thai  such  a  tax  had  been 
fully  sanctioned  by  the  United  State-  Supreme  Court,  this  line  of  argu- 
ment was  dropped. 

The  Becond  objection  was  that  a  tax  <>n  the  gross  earnings  would 
exceed  a  tax  on  the  tangible  property,  namely,  the  cars,  used  in  the 
State.  This  objection  is  stated  in  a  recent  letter  to  the  Chairman  of 
the  ( lommission,  as  follows: 

I  (Mr.  Fernald,  representing  the  Pullman  Company)  recall  distinctly  thai  in  our 
coaversation,  yon  (Governor  Pardee)  insisted  that  it  was  the  ael  results  n>  the  company 

which  Bhould  govern  the  taxation  of  its  property,  rather  than  l  he  value  of  1  he  property* 

which  it  owned.  *****  This  position  we  can  not  concede,  and  must  pro- 
test againsl  its  application  to  the  taxation  of  this  company's  property.  The  fact  that 
ih"  company  lias  valuable  property  elsewhere  and  is  a  prosperous  company  can  not, 
and  should  not  in  fairness,  he  considered  in  fixing  the  value  of  its  property  for  taxation. 
This  company  has  certain  property  which  is  used  in  California,  to  wit,  sleeping-cars, 
a  greater  part  of  which  are  used  in  interstate  commerce  and  run  heyond  the  limits  of 
the  State  of  California.  Some  few  cars  are  used  partly  in  interstate  commerce,  and 
partly  in  Intrastate  commerce,  although  not  running  regularly  beyond  the  limits  of 
the  State,  and  the  company  is  perfectly  satisfied  to  pay  taxes  to  the  State  of  California 
on  its  property  fairly  therein,  on  the  same  basis  that  other  property  in  the  Sine  i- 
taxed,  and  if  the  company  is  to  pay  such  tax  in  a  commuted  form  as  by  a  percentage  of 
gross  earnings,  it  respectfully  insists  that  the  basis  of  such  gross  earnings  should  not 
be  so  fixed  as  to  produce  a  tax  in  excess  of  what  its  tax  would  be  upon  a  property  valu- 
ation at  the  same  rate  of  levy  that  other  property  in  the  State  is  taxed. 

In  this  contention  the  company  overlooks  the  obvious  fact  that  it 
owns  and  uses  in  this  State  much  valuable  property  other  than  cars 
and  that  the  "net  result  to  the  company"  is  what  determines  "the  value 
of  the  property  which  it  owned."  The  value  of  the  property  of  the 
Pullman  Company,  as  a  going  concern,  is  determined  by  the  same  thing 
that  fixes  the  value  of  an  orange  grove  in  bearing,  namely,  its  net  in- 
come. We  may  in  this  connection  paraphrase  the  opinion  of  the  United 
States  Supreme  Court  in  the  Ohio  Express  Company  cases,  quoted  in 
the  preceding  section,  and  say: 

"  No  more  reason  is  perceived  for  limiting  the  valuation  of  the 
Pullman  Company  to  its  cars  than  that  of  railroad,  telegraph,  and 
express  companies,  to  roadbed,  rails,  and  ties;  poles  and  wires;  or 
horses,  wagons,  and  furniture.  The  unit  is  a  unit  of  use  and  manage- 
ment: and  tin-  cars;  the  contracts  for  transportation  facilities;  the 
capital  necessary  to  carry  on  the  business,  whether  represented  in 
tangible  or  intangible  property,  in  California,  possess  a  value  in  com- 
bination and  from  use  in  connection  with  the  property  and  capital 
elsewhere,  which  could  as  rightfully  be  recognised  in  the  assessment 
for  taxation  in  the  instance  of  this  company  as  the  others. " 

The  third  objection  was  that  the  Pullman  Company  has  no  account 
of  its  earnings  in  the  State  of  California,  including  California's  share 
of  interstate  earnings,  and  that  to  keep  such  an  account  merely   for 

If  this  read  "value  of  tangible  property"  it  would  more  nearly  express  the  position 
taken  by  the  Commission. 


REPORT   OP   COMMISSION   ON   REVENUE   AND    TAXATION.  201 

• 

purposes  of  taxation  would  involve  considerable  expense,  which  would 
be  in  effect  an  additional  tax.  It  was  claimed  that  to  keep  such  an 
account  would  "incur  an  expense  which  would  probably  run  to  an 
amount  equal  to  the  tax"  (presumably  the  present  tax  of  $10,000  per 
annum!).  No  instance  is  known  in  which  any  state  or  government 
allows  its  taxpayers  a  rebate  in  taxes  on  account  of  the  expense 
incurred  in  furnishing  the  information  necessary  in  order  to  levy  the 
taxes.  Mere  unwillingness  to  spend  the  money  necessary  to  furnish 
the  information  would  have  no  merit  as  an  objection  to  any  tax,  and 
would  not  be  considered  here  at  all  except  for  the  fact  that  the  company 
lavs  such  great  stress  upon  it.  In  the  opinion  of  the  Commission,  the 
probable  cost  of  keeping  a  separate  account  of  the  proportion  in  which 
California  should  share  in  each  passenger  fare  paid  by  travelers  coming 
from  or  going  to  outside  points  to  or  from  California  points  has  been 
grossly  exaggerated  by  the  company.  The  railroad  companies  find  no 
difficulty  in  rendering  accounts  in  the  desired  form,  both  for  passengers 
and  freight,  and  their  accounts  involve  far  more  items  than  the  two  or 
three  million  tickets  issued  by  the  Pullman  Company  to  California 
passengers.  With  the  modern  electrical  tabulating  machines  now  in 
use  by  the  freight  auditing  departments  of  the  great  railroads  any 
items  in  addition  to  the  regular  accounts  kept  for  general  purposes  can 
be  obtained  at  relatively  small  additional  cost. 

The  three  objections  raised  by  the  Pullman  Company  seem  to  the 
Commission  to  have  no  merit. 


SECTION  4. 

THE  TAXATION  Of  TELEGRAPH  AND  TELEPHONE  COMPANIES. 


These  companies  were  assessed,  in  1905,  for  $6,598,838  and  paid  taxes 
amounting  to  $143,895.91. 

Number  and  nature  of  these  companies. 

In  1902  there  were  ten  commercial  and  six  mutual  telephone  com- 
panies in  operation  in  the  State.  In  1905  there  were  forty-one  tele- 
phone companies  of  all  descriptions.  There  are  practically  only  two 
telegraph  companies.  Of  the  telephone  companies  many  are  mutual, 
some  using  barbed  wire  fences  for  connections.  As  an  illustration  of 
this  type  we  may  cite  the  Rio  Vista  Barbed  Wire  Telephone  Company, 
which  reports  1,200  miles  of  connections  and  130  telephones.  Bach 
subscriber  paid  the  pro  rata   expense  of  fixing  the  wire  and  $2  toward 


21  >2 


REPORT  OP   COMMISSION   ON    REVENUE   AND   TAXATION. 


making  a  switchboard  and  bought  hia  own  telephone;  the  entire  cost 
averaged  Jf'i^.  This  company  charges  no  rental,  an  obliging  druggist 
stTvini.'  as  'central,"  and  the  manager  states  "we  all  talk  as  often  as 
we  like,  as  long  as  we  like,  free."  Another  group  of  telephone  systems 
is  composed  of  those  operated  by  mining,  milling,  and  water  companies 
primarily  for  their  own  convenience  in  their  own  business.  Very 
frequently  both  these  classes  of  telephone  companies  have  switching 
privileges  with  large  commercial  systems.  The  plan  of  taxation  pro- 
posed by  the  Commission  would  apply  to  all  companies,  mutual  and 
commercial  alike.  Bui  in  so  far  as  the  mutual  companies  have  small 
receipts  or  earnings  their  taxes  would  be  small;  if  they  have  no  receipts 
their  taxes  would  be  nil. 


Local  licenses. 

In  addition  to  the  taxes  on  property  as  stated  above,  telephone 
companies  are  subject  to  local  licenses.  These  local  licenses,  which  add 
about  (9,000  to  the  burden  of  taxation  on  these  companies,  are  as 
follows: 


Alameda  city 

Alharnhra  city 

Amador  county 

Antioch  town 

Areata  town .. 

Auburn  city 

Bakerslield 

Benicia  city 

Berkeley  town 

Calaveras  county  .. 

Colusa  town . 

Corona  city 

Covina  city 

Eureka  city 

Ferndale  town 

Fnsim  city  . 

Fresno  county 

Fullerton  city 

Gilroy  city 

K>-rii  city    

Kings  county 

Lemoore  city     

Livermore  town 

Lompoc  town 

Long  Beach  city  ... 

I.'.-  A ageles      

Los  A  Dgelee  count; 

Los  Qatoe  town 

Mariposa  county 

Martinez  town 

Mill  Valley  town  . 

Modesto  city     .  

Monten  y  county 


Per  Annum. 

Per  Annum. 

|KK)  00 

Mountain  View  town 

$20  00 

30  00 

Napa  city 

4u  00 

120  00 

Oakland  city  .. 

200  00 

10  00 

Orange  city    

10  00 

20  00 

Ontario  town ... 

20  00 

32  00 

Oxnard  city 

20  00 

100  00 

Paso  Robles  city 

40  00 

20  00 

Porterville  city  . 

32  00 

20  00 

Pomona  city.-. 

20  00 

100  00 

Placerville  city 

48  00 

(in  <K) 

Red  Bluff  town 

40  00 

20  00 

Redding  city .. 

60  00 

25  00 

Redlands  city 

in  in) 

100  00 

Redondo  Beach  city 

40  00 

30  00 

Redwood  city . . 

20  00 

200  00 

R  i  \  erside  city 

60  00 

100  00 

Sacramento  city    

200  00 

20  00 

San   Buenaventura  town 

40  00 

HO  00 

San  Francisco  city 

251  00 

20  00 

San  Francisco  county 

151  00 

100  00 

San  Jacinto  city  

12  00 

8    (HI 

San  Jose'  eitv 

200  00 

12  00 

San  Juan  town 

10  00 

20  00 

San  Luis  Obispo  city 

28  ix i 

100  00 

San  Luifl  Obispo  county 

40  00 

600  00 

San  Mateo  city. 

15  00 

San  Pedro  fit  v _ 

(ill  (HI 

20  00 

Santa  Auacity 

20  00 

60  'hi 

ia  Clara  town    

50  00 

120  00 

Banta  * !lara  county 

LOO  00 

L'o  00 

Santa  Cruz  city 

•i0  00 

100  00 

Santa  Monica  town 

24  00 

lot  00 

Santa  Paula  city 

30  00 

REPORT   OF   COMMISSION   ON   REVENUE    AND   TAXATION. 


203 


Per  Annum. 

Sausalito  town... $80  00 

Selmatown 16  00 

Shasta  county 40  00 

Sonora  city 40  00 

Suisun  town 20  00 

St.  Helena 20  00 

Tulare  city 20  00 

Vacaville  town 20  00 

Vallejocity 80  00 

Visaliacity 24  00 

Watsonville 40  00 

Winters 12  00 


Per  Annum. 

Woodland $40  00 

Palo  Alto. 60  00 

Ynkacity 50  00 

llaywards 80  00 

Loyalton  town 12  00 

San  Leandro 20  00 

Dixon  town 10  00 

Concord  town _..  30  00 

Crescent  city 25  00 

Merced  city... 60  00 

Ocean  Park  city 100  00 


Payments  rendered  in  consideration  of  granting-  franchises. 

Some  of  the  telephone  companies  are  also  paying  certain  percentages 
of  their  gross  earnings  to  the  cities  in  consideration  of  the  grant  of  their 
franchises.  These  payments,  sometimes  called  taxes,  are  not  considered 
to  be  taxes  in  the  proper  or  narrower  sense,  but  are  distinctly  a  quid 
pro  quo  by  which  the  companies  have  obtained  or  rented  valuable  rights 
and  privileges  of  the  nature  of  property.  These  should  not  be  consid- 
ered as  taxes  or  as  affected  by  the  plan  proposed  by  the  Commission* 
(See  further  discussion  of  this  point  under  Chapter  III,  Part  III.) 

Proper  subjects  for  State  taxation. 

Telegraph  and  telephone  companies  present  a  particularly  clear  case 
of  an  industry  of  wide  dispersion  for  which  State  taxation  is  peculiarly 
proper  and  local  taxation  distinctly  out  of  place.  It  is,  furthermore,  so 
difficult  to  assess  this  class  of  corporations  adequately  or  equitably  on 
their  property,  mainly  on  account  of  the  large  franchise  elements  enter- 
ing into  the  value  of  their  property  and  contributing  to  their  earnings, 
that  the  ad  valorem  property  tax  completely  breaks  down  in  these  cases. 

The  inadequacy  of  the  property  tax  in  these  cases  has  been  widely 
recognized  in  other  states,  and  resort  is  had  to  some  other  basis.  The 
most  common  method  is  to  tax  both  telegraph  and  telephone  companies 
on  their  gross  earnings.  A  secondary  system  is  one  based  upon  mileage 
of  wires  or  poles,  or  in  the  case  of  telephone  companies  on  the  number 
of  transmitters  in  use. 

The  following  compilation  shows  the  system  in  use  in  each  State: 

Taxation  of  telegraph  companies  in  different  states. 

Rates  are  all  per  annum. 
Alabama.     In  addition  to  the  property  tax  a  privilege  tax;  companies  whose  lines  in 
the  State  do  not  exceed  150  miles,  $1  per  mile;  over  150  miles,  $500,  together  with  *1  per 
mile. 

Connecticut.  25  cents  on  each  mile  of  wire,  in  lieu  of  all  other  taxes  excepl  on  real 
estate. 

Delaware.  60  cents  per  mile  for  the  longest  wire  in  the  State.  30  cents  per  mile  for 
the  next  longest  wire  in  the  State,  and  20  cents  per  mile  f'>r  each  other.  Also  1%  of  the 
gross  receipts  in  the  State. 


204  REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 

Georgia.  Assessed  upon  their  property,  but  if  the  taxes  as  thus  assessed  do  not 
amount  to  2J%  of  the  gross  earnings  they  are  required  to  pay  that  amount  on  gross 
earnings. 

Louisiana.  A  tax  on  the  gross  receipts,  the  rates  being  graded  according  to  twenty 
classes,  the  lowest  including  all  wh'ose  receipts  are  under  $15,000,  for  which  the  rate  is 
$20,  and  the  highest  all  whose  receipts  are  over  $2,000,000,  for  which  the  rate  is  $6,250. 
Foreign  telegraph  companies,  30  cents  per  $100  of  gross  receipts.  In  addition  to  taxes 
on  property. 

Maine.     A  tax  on  the  gross  receipts,  graduated  as  follows: 

Gross  Receiots.  Rate 

$1,000-5,000  £% 

5,000-10,000 ......  H% 

10,000-25,000 .; ig<£ 

25,000-50,000 2*7 

And  for  each  additional  $25,000,  J%  up  to  a  maximum  of  4%  ;  in  lieu  of  all  other  taxes. 

Maryland.  2%  of  gross  receipts  from  business  done  in  the  State;  in  addition  to  this 
the  shares  of  stock  are  taxed  as  property. 

Massachusetts.  Taxed  on  that  proportion  of  the  capital  which  the  length  of  line  in 
the  State  bears  to  the  total  length  of  line  inside  and  outside  the  State,  at  the  average 
rate  of  all  taxes  on  the  general  property  tax  roll. 

Michigan.     3%  on  gross  receipts. 

Minnesota.  Taxed  on  their  property,  as  determined  and  valued  by  a  State  Board  at 
the  average  rate'on  other  property. 

New  Jersey.     2%  on  gross  earnings,  in  addition  to  local  taxes  on  property. 

New  York.  An  annual  franchise  tax  based  on  the  amount  of  capital  stock  employed 
in  the  State,  at  the  rate  of  one  fourth  of  a  mill  on  each  $1.00  for  each  1%  of  dividends 
declared  during  the  year;  also,  one  half  of  1%  of  the  gross  earnings.  These  taxes  are 
in  addition  to  the  taxes  on  local  property. 

North  Carolina.  An  annual  franchise  tax  on  capital  stock  at  rates  ranging  from  $5 
to  $500  in  seven  classes.  The  rates  are  approximately  one  half  of  1%  ;  also  a  license  tax 
of  2%  on  gross  receipts  within  the  State,  but  if  one  fourth  of  the  assets  are  invested  and 
taxable  in  the  State  the  rate  is  1£% ;  if  one  half  the  assets  are  invested  and  taxable  in 
the  State  the  rate  is  1% ;  and  if  three  fourths,  the  rate  is  one  half  of  1% ;  all  in  addition 
to  taxes  on  property. 

Oregon.     2%  on  gross  receipts  within  the  State. 

Pennsylvania.  On  capital  stock,  5  mills  per  $1;  on  interest  paid  on  loans,  4  mills; 
on  the  gross  earnings,  8  mills ;  all  in  addition  to  local  taxes  on  property. 

Rhode  Island.  1%  on  the  gross  receipts  derived  on  the  business  transacted  in  the 
State,  in  lieu  of  all  other  taxes  except  those  on  real  estate. 

Tennessee.     The  tax  is  graduated  according  to  mileage  of  wire. 

Miles  of  Wire.  Rate. 

25-    100 $20 

100-    300 200 

300-1,000 700 

1,000-6,000,  for  each  100  miles  over  1,000,  $20;  for  each   100  miles  over 
6,000,  $10;  in  addition  to  taxes  on  property. 
Texas.     1  cent  for  every  full-rate  message  sent  within  the  State  and  ^  cent  for  any 
message  less  than  a  full-rate  message.     Railroad  messages  for  running  trains  are  exempt. 
In  addition  to  taxes  on  property. 

Vermont.  3%  on  their  gross  receipts  in  the  State,  or  at  their  option,  60  cents  per  mile 
of  poles  with  one  wire,  40  cents  per  mile  for  each  additional  wire. 

Virginia.  In  addition  to  taxes  on  property,  $2  per  mile  of  wire  in  the  State,  also  2% 
of  gross  earnings  on  business  within  the  State. 

West  Virginia.  Foreign  telegraph  companies,  $1  per  mile  of  wire,  in  addition  to 
taxes  on  property.  All  domestic  companies  pay  an  annual  franchise  tax  at  graduated 
rates. 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  205 

Wisconsin.  Taxes  are  graduated  according  to  mileage:  For  sirrgle  wire,  $1  per  mile 
of  wire;  for  the  second  wire,  50  cents  per  mile;  for  the  third  wire,  25  cents  per  mile; 
and  for  each  additional  wire,  20  cents  per  mile. 

Taxation  of  telephone  companies  in  different  states. 

Rates  are  all  per  annum. 

Alabama.  Long-distance  telephone  companies,  whose  lines  do  not  exceed  200  miles 
within  the  State,  50  cents  per  mile;  over  200  miles,  $250,  and  50  cents  per  mile,  in  addi- 
tion to  taxes  on  property. 

Connecticut.  70  cents  on  each  telephone  transmitter  and  25  cents  on  each  mile  of 
wire ;  in  lieu  of  all  other  taxes  except  on  real  estate. 

Delaware.     1%  of  the  gross  receipts  within  the  State. 

District  of  Columbia.  4%  on  gross  earnings,  in  lieu  of  all  taxes  except  on  real 
estate. 

Georgia.  Assessed  upon  their  property,  but  if  the  taxes  as  thus  assessed  do  not 
amount  to  2h  i  of  the  gross  earnings  they  are  required  to  pay  that  amount  on  gross 
earnings. 

Louisiana.  A  tax  on  the  gross  receipts,  the  rates  being  graded  according  to  twenty 
classes,  the  lowest  class  including  all  whose  receipts  are  under  $15,000,  for  which  the 
rate  is  $20,  and  the  highest  all  whose  receipts  are  over  $2,000,000,  for  which  the  rate 
is  $6,250.  Foreign  telephone  companies,  $5  per  $1,000  of  gross  receipts;  in  addition  to 
ad  valorem  tax. 

Maine.     A  tax  on  gross  receipts,  graduated  as  follows: 

Gross  Receipts.  Rate. 

$1,000-5,000 £% 

5,000-10,000 1*% 

10,000-25,000 l|% 

25,000-50,000 2% 

And  for  each  additional  $25,000,  J%  up  to  a  maximum  of  4% ;  in  lieu  of  all  other  taxes. 

Maryland.  2%  of  gross  receipts  from  business  done  in  the  State ;  in  addition  to  this, 
the  shares  of  stock  are  taxed  as  property. 

Massachusetts.  Taxed  on  that  proportion  of  the  capital  which  the  number  of  tele- 
phones used  within  the  State  bears  to  all  in  use  ;  taxes  at  the  average  rate  of  the  prop- 
erty tax  throughout  the  State. 

Michigan.    3%  on  gross  receipts. 

Minnesota.    3%  on  their  gross  earnings,  in  lieu  of  all  other  taxes. 

New  Jersey.     2%  on  gross  earnings,  in  addition  to  local  taxes  on  property. 

New  York.  An  annual  franchise  tax  based  on  the  amount  of  capital  stock  employed 
in  the  State,  at  the  rate  of  J  of  a  mill  per  $1  for  each  1%  of  dividends  declared  during  the 
year;  also,  £  of  1%  of  the  gross  earnings.  These  taxes  are  in  addition  to  the  taxes  on 
local  property. 

NoRTn  Carolina.  An  annual  franchise  tax  on  capital  stock  at  rates  ranging  from 
$5  to  $500,  in  seven  classes.  The  rates  are  approximately  ^  of  1%;  also  a  license  tax  of 
2%  on  gross  receipts  within  the  State,  but  if  one  fourth  of  the  assets  are  invested  and 
taxable  in  the  State  the  rate  is  1£%;  if  one  half  the  assets  are  invested  and  taxable  in 
the  State  the  rate  is  1% ;  and  if  three  fourths,  the  rate  is  \  of  1% ;  in  addition  to  taxes 
on  property. 

Oregon.    2%  on  gross  receipts  within  the  State. 

Pennsylvania.  On  capital  stock,  5  mills  per  $1;  on  interest  paid  on  loans,  4  mills; 
on  the  gross  earnings,  8  mills ;  all  in  addition  to  local  taxes  on  property. 

Rhode  Island.  1%  on  the  gross  receipts  derived  on  the  business  transacted  in  the 
State,  in  lieu  of  all  other  taxes  except  those  on  real  estate. 

Tennessee.  Taxed  according  to  the  number  of  receivers.  In  counties  having  50,000 
population  or  over,  each  instrument  50  cents;  in  counties  of  30,000  to  50,000,  each  instru- 


206  REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 

merit  35  cents;  and  .in  counties  having  less  than  30,000,  each  instrument  20  cents;  in 
addition  to  taxes  on  property. 

Texas.    25  cents  on  each  telephone;  in  addition  to  taxes  on  property. 
Vermont.     3%  on  gross  earnings  within  the  State,  or  at  their  option,  40  cents  each  on 
the  average  number  of  transmitters,  and  30  cents  per  mile  of  wire. 
Virginia.    Taxed  according  to  the  number  of  receivers. 
No.  of  'phones.  Rate. 

Under     600 $0.50  per  'phone  per  annum 

600-1,000 75 

1,000-2,000 ----   1.00 

2,000  or  over 1.50 

West  Virginia.  Foreign  telephone  companies  $1  per  mile  of  wire  between  cities, 
towns,  or  villages,  but  not  in  local  exchanges;  in  addition  to  taxes  on  property.  All 
domestic  companies  pay  an  annual  franchise  tax  at  graduated  rates. 

Wisconsin.  An  annual  license  fee  on  gross  earnings,  as  follows:  Over  $100,000,  3%  ; 
under  $100,000,  2£%. 

Summary  of  foregoing"  tables. 

Telegraph   Companies. 

1.  Taxed   on   the  basis  of  mileage,   in   addition  to   the  ad   valorem   tax  on 

property 8  states. 

2.  Taxed  on  the  basis  of  mileage,  in  lieu  of  all  other  taxes 1       " 

3.  Taxed  on  gross  receipts,  in  addition  to  the  ad  valorem  tax  on  property 8      " 

4.  Taxed  on  gross  receipts,  in  lieu  of  all  other  taxes, ..  5      " 

5.  Taxed  on  capital  or  on  property  valued  by  a  central  commission 5      " 

6.  Taxed  on  message --     --- ---  1 

Highest  rates  on  gross  earnings:  4%,  in  Maine;  3%,  in  Michigan  and  Vermont. 

Telephone  Companies. 

1.  Taxed  on  the  basis  of  mileage  or  instruments,  in  addition  to  the  ad  valorem 

tax  on  property 6  states. 

2.  Taxed  on  thi  basis  of  mileage  or  instruments,  in  lieu  of  other  taxes 1       " 

3.  Taxed  on  gross  receipts;  in  addition  to  the  ad  valorem  tax  on  property 7       " 

4.  Taxed  on  gross  receipts;  in  lieu  of  other  taxes 8 

5.  Taxed  on  capital  or  on  property  adequately  valued 4      " 

Highest  rates  of  the  gross  earnings  tax:  4%,  in  District  of  Columbia;  3%,  in  Michigan, 
Minnesota,  Vermont,  and  Wisconsin. 

Earnings  of  telegraph  and  telephone  companies. 

We  are  fortunate  in  having  an  excellent  and  complete  set  of  returns 
in  regard  to  telegraph  and  telephone  companies,  published  by  the  United 
States  Census  Office.  The  following  tables  show  the  essential  items 
taken  from  these  reports: 

TABLE  I. 

All  Telephone  Systems,  Commercial  and  Mutual,  1902. 

California.  United  States. 

Gross  receipts .. $3,993,698  00  $81,599,769  00 

Operating  expenses  3,199,574  00  56,867,062  00 

Net  income $794,124  00  $24,732,707  00 

Taxes  --- —  - 82,807  00  2,944,281  00 

Net  to  gross.... -  19.87%  30.31% 

Taxtogross... 2.073  3.609 


REPORT   OP   COMMISSION   ON   REVENUE   AND   TAXATION.  207 

TABLE  II. 

All  Commercial  Telephone  Companies  (Exclusive  of  Mutual). 

California.  United  States. 

Gross  receipts $3,990,040  00  $81,296,444  00 

Operating  expenses 3,196,595  00  56,591,746  00 

Net  income $793,445  00  $24,704,698  00 

Taxes                      .   82,803  00  2,940,430  00 

Net  to  gross."." 19.89%  30.39% 

Taxtogross 2-075  3.617 

TABLE  III. 

Telegraph  Companies,  United  States  at  Large.     Commercial  System  Only. 

United  States. 

Gross  receipts $35,300,569  00 

Operation  and  maintenance 26,592,411  00 

Net  income $8,708,158  00 

Taxes 588,726  00 

Net  to  gross 24.7% 

Tax  to  gross 1.668 

We  have  reports  from  practically  all  California  companies  — both 
telephone  and  telegraph  —  which  show  the  following  data: 

TABLE    IV. 
Telephone  and  Telegraph,  California  1905.* 

Gross  earnings - -  $5,283,739  25 

Net  earnings 960,730  45 

Taxes 139,949  62 

Net  to  gross  earnings 18.17% 

Taxes  to  gross  earnings 2.65% 

The  average  of  taxes  to  gross  earnings  for  the  larger  telephone  companies  was  3.06%. 

Division  of  net  earnings. 

The  following  citations  from  U.  S.  Census  Bureau's  Report  brings  out 
very  clearly  the  more  important  considerations  in  regard  to  the  net 
earnings: 

"  Division  of  Net  Earnings.  The  difference  between  the  gross  receipts 
from  operation,  $81,599,769,  and  the  operating  expenses,  $56,867,062, 
gives  $24,732,707  as  the  net  earnings  from  telephone  service  proper. 
These  earnings  were  increased  by  $5,225,767,  the  income  from  other 
sources.  Of  this  total,  $8,297,709  was  used  to  defray  the  fixed  charges, 
which  included  taxes,  interest  on  funded  and  floating  debt,  and  pay- 
ments for  leased  lines.  These  fixed  charges  amounted  to  12.7%  of  the 
aggregate  expenses,  less  dividends,  as  shown  in  Table  44. 

"  When  the  fixed  charges  were  deducted  from  the  previous  net  income, 
a  new  net  income  of  $21,660,765  remained,  this  being  an  average  of 
$9.36  per  telephone.     Of  this  total,  $14,982,719  was  expended  in  divi- 

*The  companies  failing  to  make  returns  paid  taxes  amounting  to  $3,946,  or  2.8%  of  the 
whole.     This  is  a  negligible  quantity. 


208  REPORT   OF   COMMISSION   ON  REVENUE  AND   TAXATION. 

dends,  and  $6,678,046  was  reserved  as  net  surplus.  The  dividends  paid 
amounted  to  17.3%,  and  the  surplus  to  7.7%  of  the  gross  revenue.  As 
the  capital  stock  reported  was  valued  at  $274,049,697,  it  would  appear 
that  the  dividends  represented  a  return  of  nearly  5.5%.  When  the 
company  was  prosperous,  the  return  to  the  investor  would  frequently 
be  better  than  this,  especially  in  the  instances  in  which  the  stock  was 
not  fully  paid  or  had  been  issued  in  part  as  a  bonus  with  the  bonds. 

"As  a  matter  of  fact  there  were  130  systems  that  operated  at  a  loss 
during  the  year  covered  by  the  report,  their  deficit  amounting  to 
$473,419.  The  net  surplus,  therefore,  of  the  4,021  profitable  systems 
was  that  much  more  than  the  total  reported  for  the  whole  country,  or 
$7,151,465.  The  general  reservation  for  depreciation  and  reserve  appears 
to  be  inadequate,  especially  in  view  of  the  necessity  for  frequent  and 
entire  reconstruction  of  lines  and  exchanges,  on  account  of  the  growth 
of  the  industry  and  the  changes  in  the  methods  of  operations.  Some 
light  was  thrown  upon  this  point  by  the  report  of  the  Merchants'  Asso- 
ciation of  New  York  concerning  telephone  rates  in  that  city.  In  that 
report,  presented  in  June,  1905,  the  case  is  cited  of  a  company  in  Balti- 
more, Md.,  where  the  entire  original  plant,  after  being  in  service  but 
five  years,  was  disposed  of  as  junk  and  $2,155,000  was  spent  in  its 
replacement.     As  to  New  York  City  it  was  stated: 

"In  New  York  telephone  system  improvements  and  changes  have  succeeded  one 
another  at  close  intervals  during  the  entire  period  in  which  the  business  of  exchange 
telephone  service  has  existed.  During  the  sixteen  years  which  the  committee's  investi- 
gation covers,  the  plant  had  been  practically  rebuilt  three  times.  At  various  times 
radical  improvements  have  been  made  in  cables  and  in  switchboard  systems,  which 
have  involved  the  abandonment  of  plant,  by  no  means  unserviceable  because  of  its 
physical  condition,  and  its  replacement  by  plant  of  an  improved  character.  Some  of 
the  central  stations  have  been  rebuilt  three  times  within  a  little  over  ten  years. 

"These  changes  are  not  peculiar  to  New  York,  and  if  regarded  as 
occurring  all  over  the  country,  it  would  seem  that  the  percentages  of 
dividend  payments  and  of  reserve  might  well  be  reversed.  The  com- 
mittee of  the  Merchants'  Association  gave  its  opinion  as  follows: 

"To  provide  a  "fair  return  of  capital  actually  and  necessarily  invested,  and  a  proper 
allowance  for  contingencies,  10%  margin  above  operating  outlays  is  a  reasonable 
and  proper  margin  in  the  telephone  business." 

Conclusion. 

Taking  all  the  foregoing  tables  and  facts  into  consideration,  the  tele- 
phone and  telegraph  interests  seem  to  represent  a  business  whose  net 
earnings  are  about  20%  of  the  gross  earnings.  Taking  the  5.5%  basis 
for  capitalization  found  by  the  Census  Bureau  to  be  the  true  average, 
then  a  tax  rate  of  3.6%  would  be  a  fair  tax,  or  the  practical  equivalent 
of  a  tax  of  1%  on  the  gross  property. 

A  tax  of  3i%  on  the  gross  earnings  of  telephone  companies  would  but 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  209 

slightly  increase  their  present  burden  of  taxation.  If  local  licenses  are 
included  under  present  burden  it  would  be  practically  no  increase  at  all. 
A  tax  of  SV/0  on  the  gross  earnings  of  telegraph  companies  would  be 
a  material  increase  over  what  they  are  now  paying.  This  is  mainly 
because  the  tangible  property  of  such  companies,  so  far  as  found  by  the 
assessors,  is  a  very  poor  index  of  their  tax-paying  ability.  No  sub- 
stantial difference  has  been  found  between  telegraph  companies  and 
telephone  companies  which  would  justify  any  difference  in  rates. 

Constitutionality  of  a  gross  earnings  tax  on  telegraph  companies. 

The  question  of  the  constitutionality  of  a  tax  on  the  property  and 
franchises  (other  than  the  franchise  granted  by  Congress)  of  a  corpora- 
tion engaged  in  interstate  business,  the  amount  thereof  being  measured 
by  the  gross  earnings  and  including  an  equitable  proportion  of  the 
earnings  from  interstate  business,  has  been  fully  discussed  in  the  chapter 
on  the  taxation  of  railroads.  The  same  principles  apply  to  telegraph 
and  telephone  companies.  Even  the  fact  that  the  Western  Union  Tele- 
graph Company,  for  example,  enjoys  a  Federal  franchise  will  not  enable 
it  to  evade  its  just  share  of  the  taxes  imposed  for  the  support  of  the 
State  governments  under  whose  protection  it  does  business.  All  that 
the  Federal  courts  require,  in  this  case,  as  in  the  case  of  national 
banks,  or  railroads,  is  that  the  states  shall  not  impose  discriminatory 
taxes  against  those  companies  created  by  Act  of  Congress.  As  long  as 
the  tax  is  the  same  on  all  telegraph  and  telephone  companies  there  can 
be  no  discrimination. 

The  following  citation  from  Judson,  "A  Treatise  on  the  Power  of 
Taxation,  State  and  Federal,  in  the  United  States,"  gives  an  excellent 
summary  of  the  law: 

Unit  and  Mileage  Rule  as  Applied  to  Taxation  of  Telegraph  Companies.  In  two  suc- 
cessive cases  from  Massachusetts  and  one  from  Indiana  *  the  Supreme  Court  sustained 
the  taxation  of  the  Western  Union  Telegraph  Company  under  the  mileage  rule  of  appor- 
tionment; that  is,  by  taking  as  a  basis  of  assessment  such  portion  of  the  total  capital 
stock  of  the  company  as  equaled  the  ratio  of  the  company's  mileage  within  the  State 
to  its  total  mileage.  It  was  strongly  contended  that  telegraph  companies  are  Govern- 
ment agencies  and  so  not  taxable  by  State  authority,  and  that  therefore  such  portion  of 
the  Western  Union  lines  as  was  located  on  roads  declared  post  roads  by  Congress  was 
exempt.  But  the  court  said  in  the  case  first  cited,  page  54!),  that,  if  this  principle  were 
sound,  every  railroad  in  tbe  country  would  be  exempt  from  taxation  because  they  had 
all  been  declared  post  roads,  and  the  same  reasoning  would  apply  to  every  bridge  and 
navigable  stream  throughout  the  land.  It  was  held  therefore  that  the  Act  of  Congress, 
supra,  &  208,  granted  to  the  telegraph  company  no  right  of  exemption  from  taxation  of 
its  property  located  in  the  State,  and  that  this  method  of  mileage  apportionment  was  a 
reasonable  and  just  method  of  determining  the  value  of  its  lines  within  the  State. 


*W.  U.  Telegraph  Co.  vs.  Massachusetts,  L25  I".  S.  530;  Massachusetts  vs.  W.  U.  Telegraph 
Co.,  141  U.  9.  4o:  U'.  U.  Telegraph  Co.  vs.  Taggart,  163  U.  S.  1.  The  principles  of  these 
cases  were  followed  and  applied  in  State  ex  rel.  vs.  Western  Union  Telegraph  Co.,  165  Mo. 
502,  where  the  proportion  of  the  franchise  exercised  in  the  State  was  held  taxable  by 
adding  the  proportional  part/of  the  value  of  the  franchise  to  the  value  of  the  property 
located  in  the  State. 
14  — RT 


210 


REPORT   OP   COMMISSION   ON   REVENUE   AND   TAXATION. 


SECTION     . 

THE  TAXATION  Of  LIGHT,  HEAT,  AND  POWER  COMPANIES. 


jj.  B.— The  figures  given  in  the  Preliminary  Report  for  this  class  of  corporations  have 
been  very  materially  modified  as  a  result  of  more  complete  information  obtained  since 
that  report  was  compiled. 

Percentage  of  operating  expenses. 

Light,  heat,  and  power  companies  constitute  a  class  whose  operating 
expenses,  exclusive  of  depreciation,  average  about  60%  of  the  gross 
earnings.  The  expenses  of  operation  are  proportionately  larger  for 
companies  operating  in  small  towns  than  for  those  operating  in  large 

cities. 

The  following  tables,  compiled  from  the  returns  for  central  electric 
light  and  power  stations,  given  by  the  United  States  Census  Office, 
show  how  the  percentages  vary: 

UNITED  STATES  AT  LARGE. 
Central  Light  and  Power  Stations— Percentage  of  Operating  Expenses  to  Gross  Earnings. 

From  Report  U.  S.  Census,  1902. 


Population  of  Cities. 


Purely  Elec- 
tric Private 
Stations. 


General  average 
Under  5,000  . . . 
5,000-  25.000. .. 
25,0110-100,000    .. 

100,000-500,000... 

500,000  and  over . 


48  60 
59.09 
50.33 
49.20 
45.26 
43.86 


Composite 
Private 
Stations. 


Purely  Elec- 
tric Munici- 
pal Stations. 


52.67 
62.61 
55.80 
49.56 
49.47 
41.73 


59.45 
65.89 
61.88 
62.86 
52.85 
42.05 


Composite 

Municipal 

Stations. 


65.18 
66.45 
62.20 
51.00 

74.19 


General  average  all  classes  of  stations  and  all  cities,  59.62%. 

CALIFORNIA  AT  LARGE— ALL  CITIES. 
Central  Light  and  Power  Companies. 

From  Report  U.  S.  Census,  1902. 

Gross  earnings --      -   $5,066,417 

Operating  expenses. 3,052,613 


100.00  % 
60.24  % 

39.76  % 


Net  earnings -  •--•  -- .$2,014,404 

The  percentages  shown  in  the  above  tables  confirm,  in  a  remarkable 

degree,  the  returns  made  to  this  Commission  by  the  various  companies. 

The  figures  may  be  summarized  as  follows: 

CALIFORNIA. 

Light,  Heat,  and  Power  Companies— General  Summary,  in  Round  Numbers,  1904-05.* 

Gross  earnings $9,200,000  100.00% 

Operating  expenses 5,150,000  56.00% 

Netearnings — -----      $4,050,000  44.00% 


*  Includes  approximately  75%  of  all  business. 


REPORT   OF    COMMISSION   ON   REVENUE   AND   TAXATION.  211 

Companies  claim  heavy  depreciation. 

While  these  companies  appear  to  have  a  very  high  percentage  of  net 
earnings  and  would  therefore  fall  in  a  group  upon  which  the  gross 
earnings  tax  should  be  high,  it  has  been  strongly  urged  that  this  showing 
is  misleading,  on  account  of  the  heavy  depreciation  charges  necessarily 
carried.  It  is  claimed  for  this  class  of  companies  especially  that  a 
great  deal  of  the  apparatus  becomes  obsolete  even  before  it  is  worn  out, 
that  poles  and  pole  lines  deteriorate  very  rapidly,  that  franchises  have 
short  lives,  and  that  anywhere  from  5%  to  10%  of  the  cost  of  the  prop- 
erty should  be  set  aside  each  year  for  depreciation. 

This  opens  up  a  question  of  great  delicacy  and  difficulty.  As  the 
depreciation  charges  are  figured  on  the  entire  investment,  they  may, 
even  at  as  low  a  rate  as  6%  or  7%,  constitute  a  very  large  percentage  of 
the  gross  earnings. 

The  effect  of  the  depreciation  on  net  earnings,  furthermore,  varies 
with  the  age  of  the  plant,  the  extent  of  the  service  rendered,  and  how 
fully  the  equipment  is  utilized. 

All  these  matters  have  been  the  subject  of  lengthy  discussions  and 
investigations  by  engineers,  financiers,  and  public  authorities  connected 
with  such  enterprises.  The  following  citations  from  a  letter  to  the 
Commission  from  Mr.  A.  C.  Balch,  General  Manager  of  the  Pacific  Light 
and  Power  Company  of  Los  Angeles,  will  give  the  character  of  this 
discussion : 

On  page  136  of  "Finances  of  Gas  and  Electric  Light  and  Power  Enterprises,"  by 
William  D.  Marks,  Consulting  Engineer  in  Philadelphia,  depreciation  is  given  at  an 
average  of  10%. 

In  a  book  by  M.  J.  Francisco,  entitled  "The  Business  of  Municipalities  and  Private 
Corporations  Compared,"  there  are  various  reports  in  which  the  depreciation  is  valued 
at  from  5%  to  10%.  (This  is  the  edition  of  1905.)  On  page  55,  in  a  report  of  the  Bay  City 
Municipal  Lighting  Plant,  a  paper  known  as  "The  Michigan  Investor"  is  quoted  quite 
extensively;  and  taking  the  superintendent's  statements,  the  "Michigan  Investor" 
figured  that  the  depreciation  was  10%  on  the  valuation  of  the  plant. 

On  page  69,  in  a  report  on  the  municipal  plant  of  Detroit,  the  depreciation  is  taken 
as  somewhere  between  5%  and  10%. 

On  page  85,  the  depreciation  of  the  South  Norwalk  Lighting  Plant,  of  South  Norwalk, 
Ohio,  is  taken  as  5%,  as  required  by  the  laws  in  Ohio. 

Massachusetts  in  all  its  reports  on  plants  requires  a  depreciation  of  5%,  at  least. 

The  following  additional  citations  are  from  a  letter  to  the  Commission 
by  Mr.  A.  L.  Selig,  General  Manager  of  the  Edison  Electric  Company: 

Then  Mayor  Josiah  Quincyof  the  city  of  Boston  had  occasion  to  go  into  the  costs  of 
furnishing  electric  lighting  to  his  city,  and  for  the  purpose  of  determining  these  costs 
appointed  a  commission  to  investigate  the  matter.  The  commission  made  a  recommen- 
dation, after  a  most  thorough  investigation,  and  I  beg  to  quote  in  part  from  the  report 
of  this  commission,  and  also  from  the  report  of  Mayor  Quincy  to  the  Boston  City 
Council.  On  page  5  of  the  report  the  Mayor  says:  "in  respect  to  depreciation,  the 
agreement  (with  the  Electric  Company)  provides  for  allowing  the  company  to  charge  off 
as  against  the  city  such  depreciation  as  it  actually  provides  for,  but  not  exceeding  7%  on 
its  total  investment,  exclusive  of  land.  This  limit  was  fixed  after  careful  consideration, 
and  the  opinions  of  the  City  Engineers  represent  no  more  than  a  proper  allowance  for 
this  purpose." 


212  REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 

From  page  30  of  the  same  report  we  beg  to  quote  the  following:  "Some  persons,  also 
while  admitting  that  the  depreciation  in  electric  light  plants,  due  to  these  causes,  has 
been  fully  7%  to  10%  during  the  ten  years  just  past,  contend  that  no  such  rate  of  depre- 
ciation is  to  be  expected  in  the  future;  but  to  this  it  may  be  replied  that  the  experience 
of  the  recent  past  is  the  only  safe  guide  to  the  probabilities  of  the  future,  and  that  the 
manufacturers  of  electric  lighting  apparatus  are  no  more  confident  that  the  limit  of 
invention  has  been  reached  in  this  branch  of  industry  than  they  were  ten  years  ago. 
The  Massachusetts  Legislature,  in  the  Municipal  Lighting  Law  of  1891,  saw  fit  to  pre- 
scribe that  the  amount  annually  charged  off  for  depreciation  by  towns  and  cities  should 
not  be  less  than  5%.  This  act  and  the  depreciation  provision  apply  to  gas  works  as  well 
as  to  electric  light  works;  and  apparently  the  5%  is  to  be  reckoned  on  the  cost  of  the 
land  as  well  as  on  the  cost  of  machinery.  Finally,  in  the  practice  of  the  most  conserva- 
tively managed  electric  light  companies  in  this  country,  from  7%  to  10%  of  the  invested 
capital  is  annually  set  aside  for  depreciation  or  used  for  renewals  or  extensions  and 
additions;  that  is  to  say,  it  is  considered  prudent,  for  the  purpose  of  keeping  the  com- 
pany's capital  and  assets  unimpaired,  that  there  should  be  undivided  annual  earnings  to 
an  amount  equal  to  7%  to  10%  of  the  investment.  See  also  the  estimates  prepared  for 
the  town  of  Brookline  in  1896  by  Mr.  William  Jackson,  city  engineer  of  the  City  of 
Boston,  and  Messrs.  Stone  and  Webster,  electric  experts.  I  have  given  the  matter  con- 
siderable attention  at  various  times  in  a  professional  way  and  am  satisfied  that,  while 
the  exact  percentages  given  above  may  be  found  after  the  lapse  of  years  to  differ  one 
way  or  the  other  from  the  fact,  still  an  average  of  about  7%  to  7J%  per  annum  will  in  the 
long  run  be  found  to  be  the  percentage  by  which  an  electric  light  plant  deteriorates  or 
shrinks  in  value  from  the  three  causes  named,  viz.,  wear  and  tear,  the  progress  of  inven- 
tion, and  the  periodic  necessity  for  reconstruction  or  enlargement." 

A  commission  appointed  by  the  Mayor  and  General  Council  of  the  city  of  Atlanta  to 
arbitrate  the  price  to  be  paid  by  the  city  of  Atlanta  for  street  lighting,  reported  in  part 
as  follows  (on  page  14  of  its  report): 

Depreciation  of  Steam  Plant. 

On  boilers 10% 

On  engines,  pumps,  etc.. 5% 

On  piping  and  valves  5% 

On  belting 10% 

On  shafting  and  foundations 5% 

On  coaling  apparatus 10% 

Depreciation  oj  Electric  Plant. 
On  electrical  machinery --- 10% 

Depreciation  of  Buildings,  etc. 

On  buildings 2% 

On  tramways -'-     5% 

On  engineer's  house  and  stable 2% 

On  inspector's  wagons  and  harness. - -  10% 

On  repair  shop  and  tools 5% 

Depreciation  on  poles,  crossarms,  etc. 10% 

Depreciation  on  wire,  etc. -  7i% 

Depreciation  on  arc  lamps,  hangers,  etc. -. 10% 

Depreciation  on  series  lamps,  brackets,  etc. 15% 

The  amount  is  nearly  1\%  on  the  value  placed  on  the  plant. 

Application  of  these  depreciation  charges. 

The  application  of  a  scale  or  tariff  of  depreciation  charges  on  the 
different  kinds  of  property  used,  similar  to  that  above  outlined,  results 
in  most  cases  in  an  average  annual  depreciation  charge  of  about  7^%  on 
the  entire  "investment"  of  such  companies.  As  the  average  "invest- 
ment," according  to  the  returns  to  the  Census  and  other  reliable  esti- 
mates,  now  required,   amounts    to    about  6^  times   the   annual  gross 


REPORT   OF    COMMISSION   ON   REVENUE   AND   TAXATION.  213 

earnings,  H%  on  the  "  investment "  is  45.8%  of  the  gross  earnings.  (The 
computation  is  as  follows:  Every  $100  of  gross  earnings  calls  for  an 
,l  investment"  of  $625;  1V/Q  of  $625  equals  $45.81$,  or  45.8+%  of  the 
gross  earnings.)  It  follows  that,  if  the  foregoing  hypothesis  as  to  the 
proper  allowance  for  depreciation  is  correct,  no  light,  heat,  and  power 
company  can  live  if  its  operating  expenses  equal  or  exceed  about  54.2%  of 
its  gross  earnings.  It  will  be  understood,  of  course,  that  the  above  compu- 
tation applies  only  to  average  conditions  now  or  recently  existing. 
Most  of  the  plants  are  capable  of  rendering  more  service  than  they  now 
do  without  proportionate  additional  outlay.  If  the  amount  of  light, 
heat,  or  poAver  sold  doubles  and  still  does  not  exceed  the  capacity  of 
the  plant  the  basis  of  the  computation  changes  and  it  would  be  some- 
what as  follows:  If  $200  of  income  is  acquired  from  every  $625  invested 
in  plant,  then  7£%  of  $625,  or  $45.80,  is  only  22.9%  of  the  gross  earnings. 
It  is  quite  frankly  admitted  by  those  in  charge  of  this  class  of  companies 
that  they  look  to  this  anticipated  growth  of  the  service  rendered  by 
existing  plants  for  the  return  on  their  investment. 

Gross  earnings  tax. 

All  of  these  considerations  strengthen  rather  than  weaken  in  any 
way  the  arguments  in  favor  of  the  gross  earnings  tax  as  against  an  ad 
valorem  tax  on  the  property,  for  this  class  of  corporations.  »It  is  the 
only  wTay  in  which  the  government  can  count  with  certainty  on  sharing 
in  the  rapidly  growing  earnings  of  such  companies.  It  is  obvious  from 
the  foregoing  that  the  light,  heat,  and  power  companies  can  not  be 
treated  by  the  methods  successfully  applied  in  other  cases,  and  that  the 
rate  proper  to  be  levied  on  gross  earnings  must  be  determined  in  some 
other  manner. 

Use  of  the  "investment"  to  determine  the  rate. 

Finding  itself  unable  to  unravel  the  many  complications  involved  in 
the  foregoing  presentation  of  the  data  concerning  the  operation  expenses 
of  this  class  of  corporations,  the  Commission  reverted  to  first  principles. 
The  fundamental  hypothesis  of  the  Commission's  method  of  computing 
the  rate  to  be  levied  on  gross  earnings  is  that  the  rate  on  the  earnings 
should  produce  an  amount  equaling  approximately  1%  on  the  true  value 
of  the  property.  In  the  many  cases  in  which  there  were  no 
reliable  data  concerning  the  investment  or  the  value  of  the 
property,  and  in  which  that  value  is  wholly  dependent  on  earn- 
ings, as,  for  example,  in  the  case  of  railroads,  it  was  necessary  to  fall 
back  on  the  net  earnings  as  a  basis  for  computation.  This  has  been 
done  in  the  case  of  railroads  and  some  other  classes  of  corporations. 
But  in  the  case  of  light,  heat,  and  power  companies,  the  amount  or  pro- 
portion of  net  earnings  is  the  more  doubtful  element,  while  the  prop- 


214  REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 

erty  is  comparatively  knowable.  Hence  we  are  forced  back  to  an 
estimate  of  the  property. 

In  the  case  of  electric  plants  especially,  which  are  relatively  new, 
have  not  changed  hands  frequently,  and  for  which,  on  account  of  this 
very  feature  of  rapid  depreciation,  unusually  exact  accounts  are  kept  of 
the  condition  of  the  property,  it  is  comparatively  easy  to  ascertain  the 
"  cost  of  construction  and  equipment."  Not  only  has  this  been  given 
us  by  the  U.  S.  Census,  but  also  directly  by  California  companies. 

In  using  this  as  a  basis,  it  may  be  admitted  that  original  cost  less 
depreciation  may  possibly  be  above  "cost  of  reproduction"  or  present 
value;  but  as  an  offset  to  this  it  must  be  claimed  that  cost  does  not  take 
in  the  value  of  franchises.  Consequently,  the  "book  value"  of  the 
property  comes  fairly  close  to  the  true  value. 

By  taking  1%  of  the  cost  of  "investment"  we  can  arrive  directly  at 
the  amount  which  would  constitute  a  fair  tax,  and  then  by  finding  what 
percentage  that  is  of  the  gross  earnings  we  can  find  the  proper  rate  for 
the  tax  on  gross  earnings. 

The  following  estimates  are  based  upon  data  furnished  by  the  U.  S. 
Census  report  and  apply  to  private  central  electric  light  and  power 
stations,  and  to  the  year  1902: 

For  2,805  Stations,  United  States  at  Large. 

Bonds  outstanding $254,563,923 

Preferred  stock  issued ---      23,871,671 

Common  stock  issued 372,951,952 


Total  capitalization $672,515,875 

Cost  of  construction  and  equipment $482,719,879 

Deduct  estimated  depreciation* 108,000,000 

Approximate  investment,  1902 $375,000,000 

Excess  of  capitalization  over  investment  (in  round  numbers) 298,000,000 

Gross  income -   78,735,000 

1%  of  the  investment  is  $3,750,000,  or  4.76%  of  the  gross  income. 

For  105  Stations,  California. 

Bonds  outstanding $14,160,300 

Preferred  stock  issued 2,000,000 

Common  stock  issued 34,897,745 


Total  capitalization --      $51,058,045 

Cost  of  construction  and  equipment $36,131,996 

Less  estimated  depreciationt 8,700,000 

Approximate  "investment,"  1902 27,400,000 

Excess  of  capitalization  over  investment  (in  round  numbers) -.  23,600,000 

Gross  income  -. 4,937,444 

1%  of  the  "  investment"  is  $274,000,  or  5.55%  of  the  gross  income. 


*  Estimated  at  6%  on  $40,000,000  (the  amount  expended  for  equipment  in  1902)  as  the 
average  additional  equipment  for  each  of  ten  years,  depreciation  allowed  only  on  plant 
over  one  year  old. 

t  Estimated  at  6%  on  $5,210,000  (the  amount  expended  for  new  construction  in  1902)  as 
the  average  for  seven  years,  the  approximate  number  of  years  necessary  at  $5,210,000  per 
annum  to  accumulate  a  total  cost  of  $36,131,996. 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  215 

The  Census  returns  are  suggestive  only.  They  apply  to  central  electric 
stations  exclusively  and  do  not  give  depreciation  which  can  be  but 
roughly  estimated. 

Returns  from  California  companies  to  this  Commission,  including 
both  gas  and  electric  companies,  with  full  and  complete  allowance  for 
depreciation,  show  that  1%  of  the  investment  is  very  close  to  5%  of  the 
gross  earnings.  This  result  conforms  very  closely  to  the  results  obtained 
from  the  Census  figures. 

Taking  all  the  facts  into  consideration,  the  Commission  reached  the 
conclusion  that  the  rate  on  the  gross  earnings  of  this  class  of  corpora- 
tions should  not  be  less  than  4%  nor  more  than  5%. 

Taxes  now  paid. 

The  taxes  paid  in  1905  by  light,  heat  and  power  companies,  as 
returned  by  the  assessors,  aggregate  $424,487.64  on  an  assessed  valuation 
of  $20.77-V36. 

Taxation  of  light,  heat,  and  power  companies  in  different  states. 

Delaware,     g  of  \%  on  gross  earnings,  and  4%  on  all  dividends  in  excess  of  4%. 

District  of  Columbia.        Gas  companies,  5%  of  gross  earnings;  electric  light  com- 

■k 
panies,  4%  of  gross  earnings. 

Louisiana.  On  gross  earnings  in  twenty  classes,  at  rates  approximately  $2.25  per 
$1,000. 

Maryland.  Electric  light  companies,  |  of  1%  on  the  gross  receipts.  Electric  con- 
struction and  gas  companies,  H%  of  gross  receipts. 

M  assachusetts.    Covered  by  the  general  corporation  tax. 

New  Jersey.     $  of  1%  ;  also  5%  on  dividends  over  4%  ;  in  addition  to  other  taxes. 

New  York,  A  of  1%  of  gross  earnings,  and  3%  of  dividends  in  excess  of  4%  ;  in  addi- 
tion to  other  taxes. 

Ohio,    A  of  1%,  in  addition  to  other  taxes. 

Pennsylvania.     8  mills  on  the  dollar  of  gross  receipts  ;  in  addition  to  other  taxes. 

Wisconsin.  Electric  light  and  power  companies,  on  gross  receipts.  When  the  gross 
receipts  are  less  than  $800,000  per  annum,  \\%  on  the  first  $250,000,  and  2|%  on  all 
amounts  above  that.  When  the  gross  receipts  equal  $800,000  per  annum,  3%  on  the  first 
$800,000  and  4%  on  all  amounts  above  that.     Gas  companies  are  taxed  on  their  property. 


SECTION  6. 

TAXATION  Of  OTHER  PUBLIC-SERVICE  CORPORATIONS. 


WATER  COMPANIES. 

A  large  amount  of  information  was  collected  concerning  the  taxation 
of  water  companies  in  California.  It  was  found  that  they  were,  in  1905, 
assessed  for  $25,596,082  and  paid  taxes  amounting  to  $475,168.06. 


216  REPORT   OF   COMMISSION   ON    REVENUE   AND   TAXATION. 

Not  suitable  subjects  for  State  taxation. 

The  Commission  decided  not  to  recommend  the  taxation  of  this  class 
of  public-service  corporations  exclusively  by  the  State,  for  the  following 
reasons:  In  the  first  place,  it  was  found  to  be  difficult,  if  not  impossible, 
to  separate  domestic  water  service  in  cities,  towns,  and  villages  from 
irrigation  service.  Irrigation  is  a  service  so  intimately  related  to  land 
and  contributing  so  largely  to  land  values  as  to  be  inextricably  bound 
up  therewith.  It  seems  to  have  a  peculiarly  local  character,  and  hence 
to  be  inappropriate  for  State  taxation.  Water  companies  are  controlled 
and  regulated  by  the  local  governments.  In  the  second  place,  many 
of  our  cities  have  public  water  works,  and  it  does  not  seem  feasible  to 
tax  those  cities  nor  just  to  tax  private  water  works  in  other  cities  unless 
public  water  works  are  also  taxed.  In  the  third  place,  it  was  discovered 
that  water  works  are  heavily  taxed  at  present — in  some  notable  cases  very 
heavily  taxed.  The  Spring  Valley  Water  Company,  for  example,  in  1905 
paid  17%  of  its  gross  income  in  taxes.  It  was  found  that  as  the  courts 
allow  such  companies  a  fair  return  on  their  investment  and  require  the 
authorities  when  fixing  water  rates  to  fix  such  rates  as  will  allow  a  fair 
return,  the  companies  were  indifferent  as  to  the  amount  of  taxes  they 
might  be  required  to  pay. 

OIL  PIPELINE  COMPANIES. 

Oil  pipelines  are  in  some  states  subject  to  State  taxation.  But  the 
Commission  found  it  impracticable  to  bring  them  into  the  system  in 
California.  The  following  data  collected  on  this  subject  show  the 
reasons  for  this  conclusion. 

General  remarks. 

The  total  production  of  oil  in  California  was: 

In  1904 29,400,000  barrels 

In  1905 35,000,000  barrels 

California  leading  all  the  states  of  the  Union  in  these  two  years  in 
the  amount  of  production.  There  are  three  important  oil  districts;  the 
largest,  the  Kern  River  district,  near  Bakersfield,  producing  about  one 
half  the  total  output  for  California;  the  next  important,  at  Coalinga, 
west  of  Fresno;  and  third,  the  Santa  Maria  field,  near  Santa  Barbara, 
which  was  opened  in  1904  and  will  doubtless  be  the  most  important  one 
injCalifornia  in  the  near  future.  There  are  smaller  fields  at  Ventura, 
Los  Angeles,  Whittier,  Fullerton,  and  Salt  Lake.  Considerably  over 
half  of  the  oil  produced  in  California  is  of  the'  heavy  fuel  type — too 
heavy,  indeed,  to  be  successfully  pumped  through  pipes.  The  total  out- 
put of  the  Kern  River  district  consists  of  this  heavy  oil  and  the  pipe- 
line from  that  field  to  Point  Richmond  has  virtually  proved  a  failure, 


REPORT    OF    COMMISSION    ON    REVENUE    AND    TAXATION.  211 

so  far  as  pumping  this  oil  is  concerned.  They,  however,  use  it  at 
present  for  pumping  oil  from  the  Coalinga  district,  which  requires  a 
branch  line  28  miles  into  the  main  line  at  Mendota  and  thence  170 
miles  to  Point  Richmond,  the  oils  of  the  Coalinga  fields  being  of  the 
lighter  and  more  refinable  type.  Santa  Maria  produces  mostly  refining 
oil  and  some  is  also  used  for  fuel  purposes.  The  minor  fields  in  the 
vicinity  of  Los  Angeles,  Ventura,  etc.,  produce  an  intermediate  type  of 
oil,  which  is  used  both  for  refining  purposes  and  for  fuel. 

Railroad  interests  in  the  oil  industry. 

The  Southern  Pacific  Railroad  and  the  Santa  Fe  Railroad  together 
use  about  7,000,000  barrels  of  oil  a  year.  The  Salt  Lake  Railroad  used 
about  400,000  barrels  during  the  first  year  of  its  existence. 

These  roads,  therefore,  are  large  buyers  of  the  heavy  crude  oil.  The 
Southern  Pacific  controls  about  7,500  acres  of  oil  lands  and  holds  a 
large  interest  in  the  Associated  Oil  Company,  which  company,  accord- 
ing to  strong  indications,  is  allied  with  the  Standard  Oil  Company. 
The  Associated  Oil  Company  has  $30,000,000  capital  and  $5,000,000 
outstanding  bonds,  and  is  one  of  the  large  operators  in  the  Kern  River 
district,  and  also  at  Coalinga. 

The  Santa  Fe'  controls  the  Petrol  Development  Company  and  the 
Chanslor-Canfield-Midway  Company  in  the  Midway  field  southwest  of 
the  Kern  River  field.  It  does  not,  however,  operate  these  wells  at  the 
present  time,  doubtless  due  to  the  cheaper  prices  of  oils  in  the  open 
market.  The  Standard  Oil  Company,  on  the  other  hand,  is  not  only 
interested  in  Santa  Fe'  stock,  at  least  to  the  amount  of  $47,000,000,  but 
it  is  represented  in  the  directorate  of  the  Southern  Pacific  and  Union 
Pacific.  The  Salt  Lake  road  is  closely  associated  with  the  Union 
Pacific.  It  appears,  then,  that  the  interests  of  the  railroads  and  of  two 
of  the  most  important  oil  companies  in  the  State  are  intimately  related. 
Furthermore,  the  Standard  Oil  Company  is  interested  mostly  in  refin- 
ing oils  and  therefore  purchases  the  lighter  types.  The  railroads,  using 
heavy  oils,  purchase  the  heavy  types  and  consequently  they  do  not 
compete  with  each  other  in  the  open  market. 

Pipelines. 

The  principal  pipeline  in  California  is  the  one  from  Bakersfield  to 
Point  Richmond,  with  a  branch  line  from  Coalinga  as  a  feeder.  The 
Standard  Oil  Company  owns,  in  addition  to  this,  several  shorter  lines 
in  the  southern  part  of  the  State  running  to  the  coast. 

The  Associated  Oil  Company  operates  a  line  from  Coalinga  to 
Monterey,  about  80  miles  long.  This  line  was  first  put  into  operation 
in  1904  and  was  intended  by  the  promoter,  Matson,  to  be  a  common 
carrier,  but  its  acquisition  in  1905  by  the  Associated  Oil  Company  dis- 


218  REPORT   OP    COMMISSION   ON    REVENUE   AND    TAXATION. 

appointed  the  independent  oil-producers  in  the  Coalinga  district,  as  the 
Associated  Oil  Company  carries  only  its  own  oil. 

The  third  important  oil  company  in  the  State;  namely,  the  Union 
Oil  Company,  which  does  not  seem  to  have  the  railroad  affiliations  of 
the  Associated  and  Standard,  operates  three  systems  of  pipelines,  the 
first  from  Santa  Maria  field  to  Port  Harford,  some  50  miles;  another 
line  from  Ventura  field  into  Ventura;  and  the  third,  a  pipeline  into 
the  vicinity  of  Los  Angeles,  through  which  they  pump  oil  into  that  city 
and  to  points  in  the  near  vicinity. 

Transportation. 

As  mentioned  above,  less  than  half  of  the  oil  produced  in  the  State 
can  be  pumped  at  all  through  pipelines.  This  absolutely  necessitates 
that  the  railroads  shall  be  the  chief  means  of  transportation.  Fur- 
thermore, the  close  affiliations  of  the  principal  railroads  with  the 
Standard  and  Associated  Oil  Companies  practically  insures  no  compe- 
tition between  the  two  methods  of  transportation.  Besides  this,  the 
California  statutes  do  not  compel  pipelines  to  be  common  carriers  and  none 
of  them  voluntarily  assume  that  function  in  the  strict  sense  of  the  word. 
Furthermore,  the  Standard  Oil  Company  entered  into  a  private  agree- 
ment with  the  Southern  Pacific  Company  on  January  28,  1902,  not  to 
pump  any  oil  through  its  pipelines  other  than  its  own.  It  maintains, 
however,  a  constructive  freight  tariff  for  pumping  oil.  whose  rates  are 
identical  with  those  of  the  Southern  Pacific  roads.  The  pipelines  of 
the  Union  Company  are  relatively  short,  and  are  used  almost  entirely 
for  pumping  their  own  oil  out  to  the  coast  and  thence  it  is  shipped  in 
oil-tank  steamers. 

Conclusions. 

It  appears,  then,  that  the  pipeline  companies  of  California,  as  operated 
at  present,  are  not  in  the  nature  of  public-service  corporations.  While 
their  franchises  give  them  the  privileges  of  common  carriers,  they  do 
not  care  to  exercise  them,  not  being  compelled  to  do  so  by  the  laws  of 
the  State,  and  their  affiliations  and  contracts  with  the  railroads  make 
it  to  their  advantage  to  leave  the  transportation  of  oil  other  than  their 
own  to  the  railroads. 

Although  the  classes  of  corporations  considered  in  this  section  do  not 
seem  to  lend  themselves  to  State  taxation,  yet  their  franchises  are 
clearly  fit  subjects  of  State  taxation.  In  no  other  way  can  these  fran- 
chises be  uniformly  and  equitably  taxed  in  different  parts  of  the  State. 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  219 


CHAPTER  VI. 

TAXATION  Of  BANKS. 


A.  THE  TAXATION  OF  BANKS  UNDER  THE  PRESENT  SYSTEM. 

Introduction. 

The  existing  system  of  taxation  breaks  down  completely  when  applied 
to  the  taxation  of  banks. 

It  has  been  held  by  the  Federal  courts  that  the  provisions  of  the 
California  statutes  in  regard  to  the  taxation  of  national  banks  are  in 
conflict  with  the  provisions  of  the  Federal  statutes.  Hence,  the  national 
banks  pay  no  taxes  at  all  in  California,  except  on  their  real  estate. 
This  is  bad.  It  is  unjust  to  the  State  banks,  and  unjust  to  the  people 
of  the  State. 

The  provisions  of  our  revenue  law  in  regard  to  the  taxation  of  State 
banks  are  so  difficult  to  apply,  and  would,  in  many  cases,  work  so  much 
hardship  if  applied  as  it  was  originally  intended  they  should  be  applied 
that  they  are  largely  evaded.  The  result  is  that  these  banks  are  taxed 
without  uniformity,  equality,  or  regularity. 

The  reports  made  to  this  Commission  by  the  banks  throughout  the 
State  show  that  the  assessors  are  practically  powerless,  under  the 
present  system,  to  make  a  fair  and  equitable  assessment  of  the  banks. 
This  failure  of  the  tax-system  has  come  about  without  any  particular 
breach  of  the  law,  and  without  any  special  blame  attaching  to  the 
banks  or  to  the  officials  in  charge  of  the  administration  of  the  law.  The 
trouble  arises  from  the  inadequacy  of  the  present  system  of  taxation. 

The  banks  may,  by  processes  that  are  perfectly  "legal"  and  which 
can  not  even  be  called  improper,  so  manipulate  their  investments  as  to 
hold  no  property  taxable  under  the  present  law.  If  this  manipulation 
is  not  accomplished  just  before  tax  day  with  the  obvious  intent  to 
evade  taxation  there  is  no  way  in  which  the  assessor  can  call  a  bank 
to  account  therefor.  In  fact,  the  banks  are  practically  compelled  by 
the  present  system  of  taxation  to  so  handle  their  investments  as  to 
evade  taxation,  and  they  are  often  forced  to  do  this  to  the  detriment  of 
their  business.  No  bank  can  well  afford  to  hold  a  taxable  note,  stock, 
or  bond  yielding  four  or  five  per  cent  interest  if  two  out  of  the  four  or 
five  per  cent  is  liable  to  be  taken  for  taxes. 

The  reports  made  to  the  Commission  show,  furthermore,  that  there  is 


220  REPORT   OF   COMMISSION    ON   REVENUE   AND   TAXATION. 

the  greatest  diversity  in  the  application  of  the  law  in  the  different 
counties  of  the  State.  The  resulting  lack  of  uniformity  is  appalling. 
This  arises  from  the  fact  that  the  application  of  the  tax  law  to  the 
banks  is  an  extremely  complicated  matter.  To  ascertain  the  proper 
assessment  of  a  bank  requires  a  long  and  intricate  computation  and 
an  intimate  knowledge  of  the  peculiarities  of  the  banking  business, 
which  the  average  assessor  can  not  be  expected  to  have.  In  fact,  it 
often  defies  the  acumen  of  the  keenest  and  most  experienced  officers  in 
the  service. 

The  situation  grows  steadily  worse  each  year,  as  a  result  of  the 
increase  in  the  number  of  banks,  the  ever-increasing  competition  between 
the  banks  and  the  ever-increasing  complexity  of  modern  business  rela- 
tions and  business  methods.  It  is  worse  since  1905  than  ever  before,  on 
account  of  the  decision  of  the  Federal  courts,  which  has  exempted 
national  banks  from  the  operation  of  our  tax  system.  The  taxed  State 
banks  have  to  compete  with  the  untaxed  national  banks,  and  they  find 
the  taxes  a  very  severe  handicap.  Naturally  they  avail  themselves  of 
every  possible  expedient  to  get  rid  of  this  handicap  and  to  place  them- 
selves on  an  even  footing  with  their  competitors. 

An  examination  of  the  different  kinds  of  property  held  by  banks  and 
of  the  provisions  in  regard  to  their  taxation  will  show  wherein  the  law 
breaks  down. 

I.    Analysis  of  the  present  law,  with  special  reference  to  com- 
mercial banks. 

Banks  hold  the  following  classes  of  property  as  defined  or  enumerated 
by  our  revenue  laws  for  purposes  of  taxation : 

1.  Real  estate,  including  mortgages. 

2.  Personal  property,  consisting  of : 

(a)  Furniture    and   fixtures,    and    miscellaneous    items    of 

merchandise,  etc. ; 

(b)  Stocks,  bonds  and  warrants; 

(c)  Money; 

(d)  Solvent  credits; 

(e)  Franchises. 

1.  Real  estate. 

The  real  estate  belonging  to  banks,  whether  national  or  state,  is 
taxable  and  is  taxed  under  our  present  laws.  There  is  no  special  abuse 
to  be  noted  in  this  connection.  While  there  are  some  inequalities  in  the 
taxation  of  real  estate  of  banks,  they  are  no  greater  than  in  the  case  of 
other  real  estate.  There  is  no  reason  for  complaint  in  this  connection, 
for  adequate  remedies  for  such  inequalities  are  available. 


REPORT    OF    COMMISSION    ON   REVENUE   AND    TAXATION.  221 


In  the  matter  of  the  taxation  of  mortgages  there  is  no  special  ground 
for  complaint.  In  the  northern  counties  the  taxes  on  mortgages  are 
usually  paid  by  the  banks,  but  collected  again  from  the  mortgagors  in 
the  form  of  higher  interest  on  the  loan.  In  the  southern  counties  nearly 
all  mortgages  are  written  "net,"  that  is,  the  mortgagor  assumes  the 
taxes  and  in  return  receivas  a  reduction  in  what  would  otherwise  be 
the  rate  of  interest  payable  for  the  loan.  The  result  is  nearly  the  same 
in  either  case.  This  whole  subject  will  be  discussed  under  the  heading 
of  Taxation  of  Mortgages.     (See  also  Taxation  of  Savings  Banks,  below.) 

2.  Personal  property. 

(a)  Furniture  and  fixtures,  merchandise,  etc. 

This  item  consists  of  tangible  personal  property,  and  includes,  aside 
from  the  office  furniture,  etc.,  items  of  merchandise  held  or  taken  for 
debt,  and  similarcommodities.  There  is  no  reason  to  suppose  that  there 
is  any  serious  complaint  in  regard  to  the  taxation  of  this  item,  when 
found. 

The  State  banks  are  generally  taxed  for  this  part  of  their  property. 
But  national  banks  can  not  be  taxed  thereon,  as  Congress  has  given  the 
states  no  power  to  tax  national  banks  in  this  way. 

(b)  Stocks,  bonds,  and  warrants. 

If  the  stocks  or  bonds  held  by  a  bank  are  the  securities  issued  by 
California  corporations,  they  are  not  taxable.  Our  revenue  law  says 
on  this  point : 

Shares  of  stock  in  corporations  possess  no  intrinsic  value  over  and  above  the  actual 
value  of  the  property  of  the  corporation  which  they  stand  for  and  represent ;  and  the 
assessment  and  taxation  of  such  shares,  and  also  of  all  corporate  property  would  be 
double  taxation.  Therefore,  all  property  belonging  to  corporations  *  *  *  shall 
be  assessed  and  taxed.  But  no  assessment  shall  be  made  of  the  stock  in  any  corpora- 
tion   *    *    *    . 

If  the  stocks  or  bonds  held  are  the  securities  issued  by  corporations 
of  other  states  or  countries  they  are  taxable.  Such  securities  often 
make  very  desirable  investments  for  the  banks.  But  as  they  are  sub- 
ject to  taxation  the  banks  can  not  hold  them,  or  if  they  hold  them  are 
tempted  to  conceal  that  fact  from  the  assessor. 

Some  assessors  require  the  banks  to  furnish  a  list  of  the  stocks  and 
bonds  held  in  order  to  ascertain  whether  there  are  any  which  are 
taxable. 

The  bonds  of  the  United  States,  or  of  any  city  or  county  in  this  State, 
are  exempted  from  taxation.  This  is  a  wise  provision,  for  it  lowers  the 
rate  of  interest  which  the  people  have  to  pay  on  these  bonds  and  affords 
them  a  better  market.  When  a  bank  holds  bonds  of  this  description  it 
reduces  by  just  that  extent  its  taxable  assets,  and  as  will  be  shown 
below  the  result  is  an  evasion  of  its  due  and  proper  burden. 


222  REPORT   OF    COMMISSION   ON   REVENUE  AND   TAXATION. 

State,  county,  or  other  warrants  held  by  the  banks  are  taxable  as 
money.  But  it  is  comparatively  rare  that  any  of  them  get  into  the 
assessment  roll. 

None  of  the  above  are  taxable  when  held  by  a  national  bank. 

(r)   Money. 

The  full  amount  of  cash  on  hand  on  the  first  Monday  in  March  is 
taxable.  There  is  a  natural  tendency  to  employ  money  elsewheie  at 
that  time. 

Money  is  not  taxable  to  a  national  bank. 

(d)  Solvent  credits. 

The  Constitution  provides  for  the  taxation  of  "credits."  The  code 
defines  credits  as  "  those  solvent  debts,  not  secured  by  mortgage  or  trust 
deed,  owing  to  the  person,  firm,  corporation,  or  association  assessed." 
From  the  total  amount  of  such  "credits"  the  taxpayer  is  allowed  to 
deduct  his  debts,  so  far  as  they  are  due  residents  of  California. 

The  object  of  this  provision  was  to  prevent  double  taxation,  the  debts 
deducted  being  presumably  taxed  to  the  creditor.  Thus  if  A  owed  B 
$10,000  and  B  owed  C  $5,000,  while  C  owed  A  $20,000,  and  these  parties 
had  no  other  debts  or  credits,  A  would  pay  taxes  on  $20,000  credits,  the 
amount  owing  him  by  C  less  the  $10,000  owed  to  B,  or  $10,000.  In  like 
manner  B  would  pay  on  $5,000,  while  C,  inasmuch  as  he  owed  more 
($20,000)  than  was  due  him  ($5,000),  would  not  be  taxed  for  his  credits, 
but  would  be  taxed  on  the  cash  or  other  property  in  his  possession, 
amounting  presumably  to  $20,000.  The  result  would  be  that  the  tax 
roll  would  show  for  these  three  persons  an  aggregate  assessment  of 
$35,000,  or  all  the  property  involved.  In  another  connection  comment 
will  be  made  on  the  failure  to  accomplish  this  result,  even  in  the  case 
of  individuals,  and  on  certain  phases  of  objectionable  double  taxation 
involved.  Here  we  are  concerned  merely  with  its  application  to  the 
banks. 

All  of  a  bank's  loans  and  discounts  and  the  deposits  it  keeps  with  its 
correspondents  and  with  other  bankers  within  or  without  the  State, 
except  mortgages,  are  "  solvent  credits."  All  that  the  bank  owes,  includ- 
ing the  amount  owed  to  depositors,  constitute  its  debts  and  are  deduct- 
able  from  the  amount  of  its  credits.  (The  assumptions  of  the  law  that 
the  depositors  will  report  their  deposits  as  a  solvent  credit  and  pay  taxes 
thereon  is  crude,  but  does  not  call  for  more  than  passing  mention  in  this 
connection.  As  is  well  known,  depositors  do  not  make  such  returns  save 
in  rare  instances,  and  the  law  breaks  down  decidedly  in  this  respect. 
Full  discussion  of  this  point  will  be  found  in  another  part  of  this  Report.) 

In  most  cases  the  debts  (or  the  deposits)  exceed  the  credits  (or  the 
amount  of  the  loans  and  discounts),  and  nothing  is  taxable  under  this 
item.     When  anything  taxable  is  reported  the  amount  is  small.     If  we 


REPORT   OP   COMMISSION   ON   REVENUE   AND   TAXATION.  223 

take  all  the-  State  commercial  banks  together  and  treat  them  as  one 
bank,  the  solvent  credits  were,  in  August,  1905,  according  to  the  report 
of  the  Bank  Commissioners,  $148,200,000;  but  the  deposits  alone 
amounted  to  $150,000,000,  leaving  for  the  aggregate  of  all  banks  no 
excess  of  solvent  credits  to  be  taxed.  If  this  is  true  in  August,  many- 
months  from  tax  day,  it  is  presumably  equally  true  on  tax  day. 

It  is  an  interesting  verification  of  the  fact  that  these  conditions  are 
normal  and  not  created  by  the  influence  of  the  tax  laws  to  find  that 
the  relation  of  credits  and  debts  of  the  national  banks  in  the  State, 
which  are  not  taxable  on  this  item,  show  essentially  the  same  propor- 
tions. 

The  amount  of  solvent  credits  actually  taxed  to  the  banks  will  be 
found  in  the  tables  attached  to  this  report.    ' 

It  is  obvious  that  it  was  no  part  of  the  intention  of  the  law  that  both 
a  person's  credits  and  his  debts  (which  are  credits  of  some  other  person) 
should  escape  taxation.  The  only  purpose  in  allowing  a  person  to  off- 
set his  debts  against  his  credits  was  to  avoid  double  taxation,  which 
would  result  from  taxing  both.  It  is  obvious,  also,  that  the  banks  are 
not  to  blame  for  the  fact  that  the  depositors  fail  to  return  the  amount 
of  their  deposits  as  taxable  credits.  But  the  fact  remains  that  here  is 
a  mass  of  legally  taxable  property  amounting  to  over  $300,000,000,  or 
equal  to  one  fifth  of  the  present  entire  assessment  roll,  all  of  which  the 
law  assumes  to  be  taxable,  but  which  escapes  taxation  entirely. 

It  may  be  urged  with  a  great  deal  of  force  that  this  class  of  property 
ought  not  to  be  taxed,  and  that  the  law  is  faulty  in  requiring  its  assess- 
ment. Be  that  as  it  may,  the  present  system  requires  that  this  prop- 
erty be  taxed,  and  yet  it  is  not  taxed.  If  it  can  not  be  or  should  not  be 
taxed,  the  law  should  so  provide. 

The  attempt  to  tax  it  in  this  particular  way  is  bungling  and 
ineffectual. 

The  attempt  to  tax  solvent  creditors  is  one  of  the  chief  sources  of 
inequality. 

(e)    The  franchise. 

The  Constitution  includes  ^"franchises"  among  the  enumerated  items 
of  taxable  property.  The  Supreme  Court  (in  Spring  Valley  Water 
Works  vs.  Schottler,  62  Cal.  69)  has  defined  franchises  as  "special 
privileges  conferred  by  government  on  individuals  and  which  do  not 
belong  to  the  citizens  of  the  country  generally  by  common  right,"  It 
has  been  long  recognized  that  the  special  privileges  conferred  upon 
public-service  or  quasi-public-service  corporations,  such  as  the  right  to 
use  the  public  streets  by  laying  water  pipes  under  them  or  running 
street  cars  over  them,  to  distribute  gas  and  electricity,  to  operate  steam 
railroads  and  the  like,  are  franchises -and  are  taxable  property.     The 


224  REPORT   OF    COMMISSION   ON   REVENUE   AND   TAXATION. 

Supreme  Court,  in  the  case  cited  above  and  in  many  other  cases,  has 
specifically  approved  the  continued  use  of  that  method  for  the  valu- 
ation of  such  a  franchise  laid  down  in  a  section  of  the  code  which  was 
repealed  shortly  after  the  adoption  of  the  Constitution.  That  method 
is  to  deduct  the  value  of  all  tangible  property  from  the  total  market 
value  of  the  shares  of  capital  stock  and  outstanding  bonds  of  the  cor- 
poration owning  such  a  franchise.  The  difference  obtained  in  that  way 
was  the  value  of  the  franchise. 

By  a  recent  decision  (Bank  of  California  vs.  City  of  San  Francisco) 
the  Supreme  Court  has  sanctioned  the  application  of  the  same  method 
to  the  assessment  for  taxation  of  the  "franchise  to  be  a  corporation" 
and  has  approved  the  application  of  this  to  banks.  The  method  is 
fully  set  forth  in  the  following  citations  from  the  opinion  of  the  court 
in  the  case  in  question:  "The  assessor,  *  *  *  in  addition  to 
assessing  the  assessable  tangible  property  of  the"  bank,  "situate  in  said 
city  and  county,  consisting  of  land,  improvements,  furniture,  library, 
typewriter  and  money,  at  $2,311,774,  assessed  its  franchise  at  $750,- 
000."  "It  further  appears  that  the  assessor  found  that  the  aggregate 
value  of  the  tangible  property  of  the"  bank,  "including  non-assessable 
bonds  and  property  not  assessable  in  San  Francisco,  and  all  property 
assessable  therein,  was  $5,156,903.08 ;  that  the  aggregate  market  value 
of  all  the  shares  of  capital  stock  issued  by"  the  bank  "was  $8,100,000, 
and  that  the  difference  between  the  aggregate  market  value  of  said 
stock  and  the  value  of  all  tangible  property  of  the  corporation,  to  wit, 
$2,943,096.92,  was  by  him  ascertained  and  determined  to  be  the  value 
of  the  so-called  franchise  of  the"  bank,  "which  he  thereupon  assessed 
and  valued,  for  purposes  of  assessment  and  taxation,  at  the  sum  of 
$750,000." 

It  will  readily  be  seen  that  this  cumbersome  and  roundabout  method 
amounts  to  the  same  thing  as  an  assessment  of  the  total  capital  stock 
at  its  market  value,  with  a  deduction  for  the  non-taxable  securities 
held.  That  is:  $8,100,000,  the  value  of  the  stock,  less  (in  round  num- 
bers) $2,900,000  of  non-taxable  property,  is  $6,200,000,  and  this  was 
assessed  at  $2,300,000,  the  value  of  the  tangible  property,  plus  $750,000, 
the  value  of  the  "franchise";  in  all  $3,050,000  (in  round  numbers), 
which  is  50%  of  the  market  value.  This  rate  of  assessment  it  is  claimed 
is  about  the  same  as  that  applied  to  other  personal  property  of  like 
character. 

Since  this  decision  was  rendered  by  the  court,  other  assessors  who  had 
not,  heretofore,  made  a  practice  of  assessing  such  franchises  or  who  had 
assessed  them  at  nominal  rates  only  have  been  including  "franchises" 
in  the  assessments  made  against  banks. 

This  practice  is  for  the  most  part  bitterly  resented  by  the  banks. 
Such  terms  as  "a  rank  outrage,"  "paid  under  protest,"  and  the  like, 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  225 

have  been  written  in  the  reports  made  to  this  Commission  opposite  the 
entry  "assessed  valuation  of  franchise." 

The  contentions  of  the  banks  are:  that  the  mere  right  to  be  a  cor- 
poration is  not  worth  the  amount  at  which  it  would  ordinarily  be 
assessed  under  the  above  described  method;  that  this  "franchise"  costs 
only  the  fees  for  incorporation  and  the  legal  expenses  connected  with 
getting  a  charter,  and  is  worth  no  more  than  it  cost;  that  such  a  "fran- 
chise" is  not  salable,  and  hence  has  no  market  value  by  which  its  value 
as  property  can  be  ascertained;  that  such  an  assessment  is  virtually  an 
assessment  of  "good  will"  or  of  the  business  acumen  and  the  reputa- 
tions of  the  officers  and  directors,  and  these  are  not  taxed  against 
individuals  or  firms. 

There  is  no  occasion  for  this  Commission  to  express  an  opinion  upon 
this  moot  question,  for  the  plan  proposed  by  the  Commission  avoids  the 
difficulty  altogether. 

It  is  obvious  that  the  continuance  of  this  system  will  have  serious 
results.  It  will  give  rise  to  continued  friction  between  the  banks  and 
the  assessors.  It  will  tempt,  if  not  force,  the  banks  to  hold  untaxable 
securities  to  the  full  amount  of  their  capital  stock,  a  derangement  of 
their  legitimate  business,  which  is  not  in  any  sense  healthful.  More- 
over, as,  under  provisions  of  the  Federal  law,  the  franchise  of  a 
national  bank  can  not  be  taxed  in  this  or  any  other  manner,  it  consti- 
tutes discrimination  against  the  State  banks. 

The  difficulties  connected  with  the  assessment  of  franchises  as  prop- 
erty in  the  case  of  banks  are  great  enough  by  themselves  to  demonstrate 
the  necessity  for  a  fundamental  change  in  the  law,  even  if  there  were 
not  other  potent  reasons. 

II.    The  taxation  of  saving's  banks. 

Savings  banks  are  discriminated  against  by  our  revenue  laws.  Their 
taxes  are  more  than  half  again  as  heavy  as  those  paid  by  State  com- 
mercial banks,  and  five  times  as  heavy  as  those  paid  by  national  banks. 
This  is  the  direct  opposite  of  the  policy  of  most  other  states,  which 
undertake,  in  general,  to  favor  the  savings  banks  as  a  means  of  incul- 
cating thrift  among  the  people. 

This  discrimination  came  into  existence  from  a  provision  intended  to 
favor  the  depositors  in  savings  banks,  which  failed  of  its  purpose,  because 
it  failed  to  take  into  consideration  the  impossibility  of  enforcing  the  pro- 
visions of  the  law  in  regard  to  commercial  deposits.  Commercial  banks 
may,  as  stated  above,  deduct  their  debts,  among  which  are  the  deposits, 
from  all  their  taxable  credits.  This  is  allowed  because  the  deposits  are 
taxable  to  the  depositors.  But  the  depositors  evade  taxation.  In  the 
case  of  savings  banks,  however,  the  law  provides:  "But  credits,  claims, 
debts,  and  demands  due,  owing  or  accruing  for  or  on  account  of  money 
deposited  with  savings  and  loan  corporations,  shall  for  the  purpose  of 

15  — RT 


226  REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 

taxation  be  deemed  and  treated  as  an  interest  in  the  property  of  such 
corporation,  and  shall  not  be  assessed  to  the  creditor  or  owner  thereof. ' ' 
(Pol.  Code,  §  3617,  ff  6.)  Savings  banks  are,  therefore,  taxable  on  the 
entire  amount  of  their  solvent  credits  without  allowance  for  deposits. 
Hence  the  burden  of  taxation  on  savings  banks,  while  not  abnormally 
high,  is  materially  higher  than  on  commercial  banks.  Savings  banks 
are  not  overtaxed,  but  commercial  banks  are  undertaxed. 

That  provision  of  the  law  which  makes  the  bonds  of  foreign  corpora- 
tions taxable,  also  works  an  exceptional  hardship  on  savings  banks, 
which  are  confined  in  their  investments  to  mortgages,  and  to  the  non- 
taxable bonds  of  California  municipalities  or  of  California  corporations. 
This  not  only  restricts  their  field  of  investment,  to  the  detriment  of  their 
earnings,  but  is  an  actual  source  of  danger  in  times  of  special  stress, 
inasmuch  as  the  market  for  these  bonds,  should  the  banks  be  forced  to 
sell  them,  is  restricted. 

The  full  effect  of  the  discrimination  against  the  savings  banks  is 
partially  concealed  in  the  returns  to  this  Commission,  owing  to  the 
intermingling  of  accounts  in  some  of  those  banks  which,  although 
nominally  savings  banks,  do  both  a  savings  and  a  commercial  business, 
and  some  which,  nominally  commercial,  do  a  savings  bank  business. 
This  is  bad  banking  and  it  is  a  serious  fault  in  our  banking  laws  that  it 
is  permitted.  Its  dangerous  effect  is  seen  in  the  fact  that  commercial 
banks  credit  themselves  with  taxes  on  mortgages  amounting  to  $217,521, 
indicating  that  they  are  holding  $10,000,000  in  mortgages. 

Savings  banks  are  taxable  on  mortgages  held.  But  as  they  invariably 
shift  this  tax  to  the  borrower  in  the  form  of  a  higher  rate  of  interest, 
they  can  not  be  said  to  bear  the  tax.  In  the  southern  part  of  the  State 
they  do  not  even  pay  the  tax,  nearly  all  mortgages  being  written  net. 
The  amount  of  the  taxes  on  mortgages  thus  advanced  by  the  savings 
banks  was  $1,555,875.08;  by  all  the  banks  (State  savings  and  com- 
mercial) ,  it  was  $1,782,378.52. 

The  discrimination  of  our  revenue  laws  against  savings  banks  can  not 
be  justified.  It  distinctly  tends  to  discourage  thrift  by  lowering  the 
rate  of  interest  that  can  be  paid  depositors,  and  lessens  the  safety  of  a 
class  of  institutions  whose  solvency  is  of  the  utmost  importance  to  the 
community. 

Savings  banks  should  be  put  on  an  even  footing  with  all  other  banks. 

III.    The  taxation  of  national  banks  in  California. 

California  has  always  had  difficulty  in  making  her  revenue  laws 
effective  for  the  taxation  of  national  bank?,  on  account  of  her  failure 
to  observe  the  provisions  of  the  National  Banking  Act  in  regard  to  the 
taxation  of  this  class  of  banks.  The  provisions  of  that  act,  and  the 
decisions  of  the  United  States  courts  in  interpretation  thereof,  are  set 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  227 

forth  in  full  below.  It  was  not,  however,  until  well  into  the  nineties 
that  this  weakness  in  our  law  became  of  any  great  practical  impor- 
tance, as  there  were  few  national  banks  in  the  State.  But,  during  the 
period  from  1890  to  1896  especially,  a  number  of  State  banks  passed 
into  the  national  banking  system  and  some  new  banks  were  formed 
under  the  Federal  protection.  These  banks  became  national  banks 
rather  than  State  banks  primarily  to  evade  State  taxation,  as  they  were 
very  nearly  exempt  from  taxation  under  the  law  as  it  then  stood.  To 
meet  this  condition  the  State  revenue  law  was  amended  in  1899.  Sec- 
tion 3609  of  the  Political  Code,  which  was  adopted  at  that  time,  follows 
in  its  provisions  as  closely  as  may  be  the  requirements  of  the  National 
Banking  Act  in  regard  to  the  taxation  of  those  banks.  In  this  respect 
it  provides  a  different  method  for  the  taxation  of  national  banks  than 
that  which  it  applied  to  the  state  banks  : 

Section  3609.  The  stockholders  in  every  national  banking  association  doing  business 
in  this  State,  and  having  its  principal  place  of  business  located  in  this  State,  shall  be 
assessed  and  taxed  on  the  value  of  their  shares  of  stock  therein  ;  and  said  shares  shall 
be  valued  and  assessed  as  is  other  property  for  taxation,  and  shall  be  included  in  the 
valuation  of  the  personal  property  of  such  stockholders  in  the  assessment  of  the  taxes  at 
the  place,  city,  town,  and  county  where  such  national  banking  association  is  located,  and 
not  elsewhere,  whether  th-  said  stockholders  reside  in  said  place,  city,  town,  or  county, 
or  not;  but  in  the  assessment  of  such  shares,  each  stockholder  shall  be  allowed  all  the 
deductions  permitted  by  law  to  the  holders  of  moneyed  capital  in  the  form  of  solvent 
credits,  in  the  same  manner  as  such  deductions  are  allowed  by  the  provision  of  para- 
graph six  of  section  thirty-six  hundred  and  twenty-nine  of  the  Political  Code  of  the 
State  of  California.  In  making  such  assessment  to  each  stockholder,  there  shall  be 
deducted  from  the  value  of  his  shares  of  stock  such  sum  as  is  in  the  same  proportion  to 
such  value  as  the  total  value  of  its  real  estate  and  property  exempt  by  law  from  taxa- 
tion bears  to  the  whole  value  of  all  the  shares  of  capital  stock  in  said  national  bank. 
And  nothing  herein  shall  be  construed  to  exempt  the  real  estate  of  such  national  bank 
from  taxation.  And  the  assessment  ami  taxation  of  such  shares  of  stock  in  said 
national  banking  associations  shall  not  be  at  a  greater  rate  than  is  made  or  assessed 
upon  other  moneyed  capital  in  the  hands  of  individual  citizens  of  this  State. 

When  this  act  first  went  into  force  it  appeared  that  the  difficulties  in 
regard  to  the  taxation  of  the  national  banks  had  been  solved.  The 
banks  seemed  not  to  realize  the  full  significance  of  the  deductions  that 
were  allowed  from  the  market  value  of  the  stock.*  It  was  not  long, 
however,  before  the  possibility  of  evading  taxation  under  the  law  was 
discovered.  The  following  table,  prepared  by  Assessor  Dodge  of  San 
Francisco,  shows  very  vividly  how  badly  the  law  worked  during  the 
five  years  that  it  was  in  force  and  how  the  banks  took  advantage  of  its 
weaknesses: 

Assessment  of  National  Bank  Stock,  San  Francisco,  1900. 

No- of   As<M»samPTii  T-ix  Assessment 

Shares   Assessment.         lax.  per  Share. 

First  National  Bank    ...15,000  $2,100,000  $34,230  $110  00 

Crocker-Woolworth  National  Bank 10,000  1,314,663  21,429  13146 

Nevada  National  Bank 30,000  3,390,000  55,257  n:;00 

San  Francisco  National  Bank 5,000  521,760  8,505  104  35 

Totals -  60,000     $7,326,423      $119,421 

*See  Section  3609,  Political  Code,  quoted  in  full  above. 


228 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 


Assessment  of  National  Bank  Stock,  San  Francisco,  1904. 

No  of     .  t         rr  Assessment 

Shares.  Assessment.        lax.  per  Share. 

American  National  Bank 10,000     Nothing      Nothing      (Exemptions 

Crocker  National  Bank 10,000     Nothing      Nothing     ^exceeded 

First  National  Bank -.    15,000     Nothing       Nothing      (  stock  value. 

Germania  National  Bank 3,000       $216,000  $3,536        j^plShare. 

Nevada  National  Bank 30,000        480,000  7,858         j  ^g j^rshare. 

San  Francisco  National  Bank 5,000     Nothing      Nothing      j  exceeded118 

Western  National  Bank 5,000     Nothing       Nothing      }  stock  value. 

Totals 78,000       $696,000  $11,394 

Not  only  was  the  law  practically  inoperative  so  far  as  getting  revenue 
was  concerned,  but  it  was  destined  to  become  extinct. 

Inasmuch  as  the  method  laid  down  for  the  taxation  of  national  banks 
was  different  from  that  laid  down  for  the  taxation  of  other  banks,  it  was 
early  contended  that  the  rate  of  taxation  was  different  also,  and  that 
this  would  invalidate  the  act  as  in  conflict,  with  the  provisions  of  the 
national  banking  law.  This  point  was  carried  into  court  and  finally 
decided  against  the  State  in  the  case  of  San  Francisco  National  Bank 
vs.  Dodge  (Assessor,  City  and  County  of  San  Francisco),  25  Sup.  Ct. 
Rep.  384.     A  rehearing  was  denied. 

The  chief  point  in  this  decision  is  that,  the  law  of  1899  discriminates 
against  national  banks,  inasmuch  as  State  banks  are  taxed  upon  the 
value  of  their  property  and  the  national  banks  upon  the  market  value 
of  their  shares.  This  "market  value"  embraces  not  only  the  book 
value  of  all  the  assets  of  the  corporation,  but  also  the  good  will  of  the 
business,  the  dividend-earning  power  of  the  corporation,  the  ability 
with  which  the  office  force  is  managed,  the  confidence  reposed  in  the. 
capacity  and  permanency  of  tenancy  of  the  officers  of  the  corporation, 
and  all  those  other  and  indirect  and  intangible  increments  of  value 
which  enter  into  an  estimate  of  the  value  of  shares  of  stock  and  which 
fix  the  market  value  or  selling  price  of  the  shares.  The  State  banks 
are  assessed  upon  their  "property";  but  the  "intangible  assets"  just 
referred  to  are  not  necessarily  within  the  meaning  of  the  term  "prop- 
erty." Therefore,  the  consequence  of  this  situation  is  to  give  rise  to  a 
discrimination  against  national  banks. 

In  support  of  this  contention  the  court  found  that  the  assessors  did 
not  cover  under  the  term  "  franchise  "  those  items  of  value  belonging 
to  the  State  banks  which  were  described  by  the  court,  as  cited,  above, 
under  the  term  "  intangible  assets,"  and  which  in  its  opinion  entered 
into  the  market  value  of  the  stock  of  the  national  banks  as  taken  by 
the  assessor.  On  this  finding  the  court  decided  that  the  law  was  in 
conflict  with  the  Federal  law,  and  invalid. 

This  decision  was  rendered  while  the  Legislature  of  1905  was  in  ses- 
sion. A  new  law  was  hastily  drawn  up,  which,  however,  did  not  meet 
with  the  approval  of  those  who  would  have  to  administer  it,  although 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  229 

it  was  intended  to  keep  within  the  lines  laid  down  by  the  United  States 
court  in  the  decision  above  referred  to.  The  Legislature  then  referred 
the  whole  matter  to  this  Commission. 

Since  that  time  national  banks  have  been  legally  taxable  only  on 
whatever  real  estate  they  might  hold.  As  the  law  discountenances  the 
holding  of  real  estate  by  these  banks,  save  for  bank  premises,  the  taxes 
on  this  are  a  very  small  proportion  of  what  is  properly  due  from  these 
banks  for  the  benefits  conferred  upon  them  by  the  State  and  local 
governments.  Some  few  of  the  national  banks,  realizing  this,  have 
voluntarily  submitted  to  an  assessment  that  they  knew  was  not  enforce- 
able by  law  and  have  paid  taxes  thereon.  The  number  of  banks  show- 
ing this  conscientious  and  patriotic  spirit  is  noc  large,  nor  has  their 
generosity  in  this  direction  been  carried  to  any  Quixotic  length,  as  the 
amount  they  thus  contribute  to  the  support  of  government  is  never  very 
large,  nor  even  approximately  what  should  be  required  of  them. 

The  national  banks  of  California,  with  capital  and  surplus  of 
.$30,000,000,  in  round  numbers,  are  assessed  for  a  little  over  $3,000,000, 
and  pay  in  taxes  only  $73,700.  If  assessed  as  other  property  is  assessed 
these  banks  should  be  assessed  for  about  $20,000,000  and  their  taxes 
would  be  about  $400,U00. 

The  national  banks  must  be  required  to  contribute  their  share  toward 
the  support  of  government.  The  gentlemen  in  charge  of  these  banks 
have  expressed  a  perfect  willingness  to  pay  all  that  can  be  justly 
required  of  them.  They  will  not,  of  course,  pay  more  than  they  have 
to,  and  the  blame  for  the  above  stated  conditions  rests  entirely  on  the 
law. 

The  Federal  courts  have  decided  that  there  is  only  one  way  in  which  it 
is  legal  to  tap-  national  banks,  and  have  further  decided  that  even  that 
method  becomes  illegal  if  it  is  not  applied  to  all  other  banks.  In  other 
words,  if  the  State  is  to  tax  national  banks  at  all  it  must  tax  all  banks 
by  the  same  method,  and  that  method  must  be  the  one  laid  down  by 
Congress  for  the  taxation  of  national  banks. 

The  hands  of  the  State  are  absolutely  tied  so  far  as  national  banks 
are  concerned,  and  practically  (because  of  the  obvious  necessity  of 
taxing  national  banks)  tied  as  to  the  method  of  taxing  State  banks. 

Fortunately  the  method  laid  down  by  Congress  for  the  taxation  of 
national  banks  is  a  just  and  equitable  one,  and  can,  with  an  amend- 
ment to  our  Constitution,  be  readily  introduced. 

In  view  of  these  considerations  it  becomes  doubly  important  to  know 
precisely  what  the  Federal  law  provides  in  regard  to  the  taxation  of 
national  banks.  Hence  this  Commission  has  prepared  a  digest  of 
everything  the  courts  have  decided  in  that  regard.  Invaluable  assist- 
ance in  the  preparation  of  this  digest  was  found  in  Judson,  "  The  Law 
of  Taxation.''    The  original  cases  have  been  examined  in  every  instance. 


230  REPORT   OF    COMMISSION   ON   REVENUE   AND   TAXATION. 


Points  decided  by  the  courts  in  interpretation  of  Section  5219  of  the 
Revised  Statutes,  and  bearing  on  the  amendment  proposed  by  the 
Commission. 

In  general. 

The  power  of  the  State  to  tax  national  banks  rests  solely  upon  the 
permission  of  Congress.  Congress  has  provided  the  method  in  which 
this  power  may  be  exercised,  and  no  other  method  is  legal. 

U.  S.  Revised  Statutes,  Sec.  5219 :  "Nothing  herein  shall  prevent  all  the  shares 
in  any  association  from  being  included  in  the  valuation  of  the  personal  property  of 
the  owner  or  holder  of  such  shares,  in  assessing  taxes  imposed  by  the  authority  of 
the  State  in  which  the  association  is  located ;  but  the  Legislature  of  each  State  may 
determine  and  direct  the  manner  and  place  of  taxing  all  shares  of  national  banking 
associations  located  within  the  State,  subject  only  to  the  two  restrictions,  that  the 
taxation  shall  not  be  at  a  greater  rate  than  is  assessed  upon  other  moneyed  capital 
in  the  hands  of  individual  citizens  of  such  State,  and  that  the  shares  of  any  national 
banking  association  owned  by  non-residents  of  any  State  shall  be  taxed  in  the 
city  or  town  where  the  bank  is  located,  and  not  elsewhere.  Nothing  herein  shall 
be  construed  to  exempt  the  real  property  of  associations  from  either  State,  county, 
or  municipal  taxes  to  the  same  extent,  according  to  its  value  as  other  real  property 
is  taxed." 

This  provision  has  been  interpreted,  (1)  By  definition  of  the  terms; 
(2)  By  prohibition  of  certain  powers  claimed  by  the  states;  (3)  By 
granting  certain  powers  to  the  states. 

A.  Defining  the  terms.  1.  "Other  moneyed  capital"  positively 
defined : 

(a)   " Other  moneyed  capital"  is  other  taxable  moneyed  capital. 
Van  Allen  vs.  Commissioners,  4  Wall.  244 ; 
Lionberger  vs.  Bouse,  9  Wall.  468. 

(&)  If  none  other  is  taxable  it  may  be  bank  shares  only.  In  First 
Nat.  Bank  of  Wilmington  vs.  Herbert,  44  Fed.  Rep.  158,  it  was  held  that 
"where  the  only  subjects  of  taxation  were  real  estate,  live  stock  and 
bank  shares,  it  was  no  ground  for  complaint"  that  "moneyed  capital" 
other  than  bank  shares  was  not  taxed. 

(c)  The  leading  authority  on  "other  moneyed  capital"  is  Mercantile 
National  Bank  vs.  New  York,  121  U.  S.  139  (affirming  28  Fed.  Rep.  176). 

In  this  case,  confirmed  by  subsequent  cases,  the  meaning  of  "other 
moneyed  capital"  is  restricted  to  capital  competing  with  national  banks. 

Nat.  Bank  of  Garnett  vs.  Ayers,  160  U.  S.  660; 
Talhott  vs.  Silver  Bow  County,  139  U.  S.  438; 
First  National  Bank  vs.  Chapman,  173  U.  S.  205; 
Aberdeen  Bank  vs.  Chehalis  County,  166  U.  S%  440; 
Bank  of  Commerce  vs.  Seattle,  166  U.  S.  463. 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  231 

The  definitions  in  the  New  York  case  are: 

"Of  course  it  includes  shares  in  national  banks;  the  use  of  the  word 
'other'  requires  that.  If  bank  shares  were  not  moneyed  capital,  the 
word  'other'  in  this  connection  would  be  without  significance.  But 
'moneyed  capital'  does  not  mean  all  capital,  the  value  of  which  is 
measured  in  terms  of  money.  In  this  sense,  all  kinds  of  real  and  per- 
sonal property  would  be  embraced  by  it,  for  they  all  have  an  estimated 
value  as  the  subjects  of  sale.  Neither  does  it  necessarily  include  all 
forms  of  investments  in  which  the  interest  of  the  owner  is  expressed  in 
money.  Shares  of  stock  in  railroad  companies,  mining  companies, 
manufacturing  companies,  and  other  corporations,  are  represented  by 
certificates  showing  that  the  owner  is  entitled  to  an  interest,  expressed 
in  money  value,  in  the  entire  capital  and  property  of  the  corporation, 
but  the  property  of  the  corporation  which  constitutes  its  invested  capital 
may  consist  mainly  of  real  and  personal  property,*  which,  in  the  hands 
of  individuals,  no  one  would  think  of  calling  moneyed  capital,  and  its 
business  may  not  consist  in  any  kind  of  dealing  in  money,  or  com- 
mercial representatives  of  money."     *     *     * 

"The  terms  of  the  Act  of  Congress,  therefore,  include  shares  of  stock 
or  other  interests  owned  by  individuals  in  all  enterprises,  in  which  the 
capital  employed  in  carrying  on  its  business  is  money,  where  the  object 
of  the  business  is  the  making  of  profit  by  its  use  as  money.  The 
moneyed  capital  thus  employed  is  invested  for  that  purpose  in  securities 
by  way  of  loan,  discount,  or  otherwise,  which  are  from  time  to  time, 
according  to  the  rules  of  the  business,  reduced  again  to  money  and 
reinvested.  It  includes  money  in  the  hands  of  individuals  employed 
in  a  similar  way,  invested  in  loans  or  in  securities  for  the  payment  of 
money,  either  as  an  investment  of  a  permanent  character,  or  temporarily 
with  a  view  to  sale  or  repayment  and  reinvestment.  In  this  way  the 
moneyed  capital  in  the  hands  of  individuals  is  distinguished  from  what 
is  known  generally  as  personal  property." 

2.  "Other  moneyed  capital  "  defined  by  exchtsion. 

(a)  Trust  companies  under  the  New  York  statute  were  held  not  to  be 
competing  with  national  banks. 

Jenkins  vs.  Neff,  22  Sup.  Ct.  Rep.  905. 

(ft)  Savings  banks  held  not  to  be  competing  with  national  banks 
even  when  lending  on  personal  security. 

Bank  of  Redemption  vs.  Boston,  125  U.  S.  68; 

Davenport  Bank  vs.  Davenport  Bd.  of  Equalization,  123  U.  S.  83. 

(c)  Building  and  Loan  Associations,  ibid. 

Mercantile  Nat.  Bank  of  Cleveland  vs.  Hubbard,  98  Fed.  Rep. 
465. 


232  REPORT   OP   COMMISSION   ON   REVENUE   AND   TAXATION. 

3.  "  Taxation  shall  not  be  at  a  greater  rate." 

(a)  Equality  requires  equality  in  valuation  as  well  as  in  rate  of  taxa- 
tion. 

"  This  valuation,  then,  is  part  of  the  assessment  of  taxes.  It  is  a 
necessary  part  of  every  assessment  of  taxes  which  is  governed  by  a 
ratio  or  percentage.  There  can  be  no  ratio  or  percentage  without  a 
valuation.  This  taxation,  says  the  act,  shall  not  be  at  a  greater  rate 
than  is  assessed  on  other  moneyed  capital.  What  is  it  that  shall  not 
be  greater  ?  The  answer  is,  taxation.  In  what  respect  shall  it  be  not 
greater  than  the  rate  assessed  upon  other  capital?  We  see  that  Con- 
gress had  in  its  mind  an  assessment,  a  rate  of  assessment,  and  a  valua- 
tion, and,  taking  all  these  together,  the  taxation  on  these  shares  was 
not  to  be  greater  than  on  other  moneyed  capital." 

People  vs.  Weaver,  100  U.  S.  539,  1.  c.  p.  545; 

Merchants  and  Manufacturers''  Bank  vs.  Penn.,  167  U.  S.  461. 

See  also  what  has  been  held  to  be  discriminations  and  wThat  not,  B  6 

and  C  9. 

» 

B.     The  states  may  not: 

1.  Exact  a  license,  or  analogous  tax. 

Second  Nat.  Bank  of  Titusville  {Pa.)  vs.  Caldwell,  13  Fed  R. 
429. 

2.  Tax  any  property  of  national  banks  other  than  real  estate. 

San  Francisco  vs.  Bank,  92  Fed.  273; 

Rosenblatt  vs.  Johnston,  104  U.  S.  462; 

First  Nat.  Bank  vs.  San  Francisco,  129  Cal.  96. 

3.  Levy  a  tax  on  the  franchise. 

Owensboro  Nat.  Bank  vs.  Owensboro,  173  U.  S.  664. 

4.  Tax  the  capital  of  the  bank  in  solido  against  the  bank. 

(Numerous  State  cases.) 

5.  Tax  the  shares  of  non-resident  shareholders  elsewhere  than  in  the 
town  or  city  where  the  bank  is  located. 

(The  real  meaning  of  this  has  not  been  brought  out  in  any  cases, 
save  that  it  prohibits  the  non-resident  shareholders'  home  State  from 
taxing  the  shares.) 

6.  Discriminate  against  national  banks  in  any  of  the  following  ways: 

(a)  By  allowing  State  banks  only  to  deduct  capital,  etc.,  invested  in 
exempt  securities. 

Bradley  vs.  People,  4  Wall.  459. 

(b)  By  levying  a  different  rate  on  national  banks  than  on  State 
banks. 

Merchants  and  Manufacturers'1  Bank  vs.  Penn.,  167  U.  S.  461. 


REPORT    OP    COMMISSION    ON   REVENUE   AND    TAXATION.  233 

(c)  By  exempting  from  local  taxation  a  very  material  part,  rela- 
tively, of  other  moneyed  capital  in  the  hands  of  individual  citizens 
within  the  same  jurisdiction  or  taxing  district.  (As  railroad  and  other 
securities.) 

Boyer  vs.  Bayer,  113  U.  S.  689. 
But  this  has  since  been  modified.     (See  definitions  Ale.) 

(d)  By  allowing  owners  of  personal  property  in  general  to  "swear 
off"  debts  from  personal  property  and  not  extending  the  same  privilege 
to  shareholders  in  national  banks. 

People  vs.  Weaver,  100  U.  S.  539; 
Supervisors  vs.  Stanley,  105  U.  S.  305; 
Hills  vs.  Exchange  Bank,  105  U.  S.  319. 
But  this  has  been  modified.     (See  C  9/.) 

(e)  By  allowing  taxpayers  in  general  to  deduct  their  debts  from  the 
sum  of  their  credits,  moneys  at  interest,  and  demands  against  persons 
or  corporations,  and  not  allowing  same  from  national  bank  shares. 

Whitbeck  vs.  Mercantile  Bank,  127  U.  S.  193; 
Evansville  Bank  vs.  Britton,  105  U.  S.  322. 
But  this  has  been  modified.     (See  C  9/.) 

(f)  By    intentional  and  habitual  undervaluation  of  other  moneyed 

capital. 

Pelton  vs.  National  Bank,  101  U.  S.  143; 

Whitbeck  Mercantile  National  Bank  of  Cleveland,  127  U.  S.  193. 
But  see  C  9  j. 

C.     The  states  may: 

1.  Tax  the  real  estate  of  national  banks  as  other  real  estate  is  taxed. 
See  Revised  Statutes,  Section  5219. 

There  is  no  provision  in  the  Federal  statute  that  the  assessed  val- 
uation of  the  real  estate  must  be  deducted  from  the  capital  in  deter- 
mining the  value  of  the  shares,  but  if  such  deduction  is  allowed  in  any 
other  cases,  as  of  other  corporations,  it  must  be  allowed  to  national 

banks. 

City  Nat.  Bank  vs.  Padvcah,  U.  S.  Circuit  Court  of  Kentucky, 

1  Nat.  Bank  Cases,  300. 
This    view   is    generally   held    by  State  courts,   but  based    on  State 

statutes. 

The  Federal  courts  have  held  that  if  the  State  allows  double  taxation 
of  other  moneyed  capital  invested  in  corporate  shares,  by  the  taxation 
of  both  the  shares  and  the  property,  the  national  bank  act  does  not 
prohibit  the  same  thing  in  the  case  of  national  banks. 

People's  Nat.  Bank  vs.  Marye,  107  Fed.  Rep.  570. 

2.  Tax  the  shareholders  on  the  value  of  the  shares,  subject  to  con- 
ditions imposed.     See  statute. 


234  REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 

3.  Require  the  bank  to  pay  the  taxes  levied  on  shareholders,  as  agent 
for  shareholders. 

Nat.  Bank  vs.  Commonwealth,  9  Wall.  353. 

4.  Collect  taxes  levied  on  shares  by  distraint. 

First  Nat.  Bank  of  Omaha  vs.  Douglas  County,  3  Dillon  330. 
Also  enforce  other  pains  and  penalties  for  non-payment. 
Palmer  vs.  McMahon,  133  U.  S.    660. 

5.  Require  the  bank  to  pay  the  taxes  levied  on  shareholders,  even 
though  State  banks  are  not  required  to  do  so. 

Merchants'  Bank  vs.  Penn.,  167  U.  S.  461. 

6.  Assess  the  shares  at  their  fair  cash  value  on  the  assumption  that 
the  bank  will  continue  its  business,  and  not  at  what  they  would  be 
worth  in  case  the  bank  should  be  wound  up. 

Nat.  Bank  of  Commerce  vs.  New  Bedford,  155  Mass.  313. 
In  Hepburn  vs.   School  Directors,  33  Wall.   480,  the   Supreme  Court 
held  that  the  par  value  of  the  stock  does  not  indicate  its  value. 

7.  In  the  valuation  of  the  shares,  ignore  the  fact  that  the  capital  or 
surplus  is  invested  in  property  itself  exempt,  even  if  in  United  States 
bonds. 

Talbott  vs.  Silver  Bow  County,  139  U.  S.  438. 

This  principle  extends  to  holding  of  bonds  or  stocks  taxed  in  the  State. 
Pac.  Nat.  Bank  of  Tacoma  vs.  Pierce  Co.,  20  Wrash.  675. 

8.  Include  in  the  valuation  of  the  shares,  real  estate  located  in  other 
states  and  taxed  there. 

Commercial  Bank  vs.  Chambers,  182  U.  S.  556; 
American  Coal  Co.  vs.  County  Commissioners,  59  Md.  185, 194. 
Real  estate  within  the  State  and  taxed  there  must  be  deducted. 

9.  The  following  provisions  of  law  have  been  held  to  make  no  dis- 
crimination against  national  banks. 

(a)   Exempting  property  held  for  charitable  or  religious  uses. 

(6)  Exempting  mortgages,  judgments,  recognizances,  and  money 
owing  on  agreements  to  sell  real  estate. 

In  Hepburn  vs.  School  Directors,  23  Wall;  480,  the  court  said: 

"  This  is  a  partial  exemption  only.  It  was  evidently  intended  to 
prevent  a  double  burden  by  the  taxation  both  of  property  and  debts 
secured  upon  it.  Necessarily  there  may  be  other  moneyed  capital,  as 
such  is  not  exempt.  Some  part  of  it  only  is.  It  could  not  have  been 
the  intention  of  Congress  to  exempt  bank  shares  from  taxation  because 
some  moneyed  capital  was  exempt." 

This  was  modified  in  Boyer  vs.  Boyer,  113  U.'S.  689.  See  under  dis- 
criminations prohibited,  B  6  c,  above. 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  235 

(c)  Exempting  shares  of  either  railroad,  business,  insurance  or  min- 
ing companies. 

Mercantile  Bank  vs.  New  York,  121  U.  S.  138. 

(d)  Exempting  municipal  bonds. 

Case  last  above  cited. 

(e)  Exempting  stocks  of  corporations  organized  under  laws  of  other 

states. 

Newark  Banking  Co.  vs.  Newark,  121  U.  S.  163. 

(f)  Allowing  deductions  of    debts  from    solvent   credits    when   the 
shares  of  State  banks  were  taxed  precisely  as  were  shares  in  national 

banks. 

Nat.  Bank  of  Wilmington  vs.  Chapman,  173  U.  S.  205. 

(g)  Allowing  unincorporated  banks  to  deduct  debts  before  determin- 
ing the  real  value  of  capital  employed. 

Case  last  above  cited. 

(h)   Failure  to  assess  other  moneyed  capital. 

Aberdeen  Bank  vs.  Chehalis  County,  166  U.  S.  440. 
(This  seems  contrary  to  the  spirit  of  the  decision  in  San  Fran- 
cisco  Nat.  Bank  vs.  Dodge.) 
(i)  A  difference  in  the  rate  of  taxation,  provided  State  banks  and 
"competing  moneyed  capital"  are  treated  in  the  same  way. 

Merchants'    and    Manufacturers'    Bank  vs.  Pennsylvania,  167 
U.  S.  461. 
(J)  By   unintentional  differences  in  valuation  or  mere  mistakes  in 
judgment. 

Stanley  vs.  Supervisors  of  Albany,  121  U.  S.  535; 
Nat.  Bank  vs.  Kimbal,  103  U.  S.  732; 
Exchange  Nat.  Bank  vs.  Miller,  19  Fed.  Rep.  372. 
But  these  rulings  are  shaken  by  San  Francisco  Nat.  Bank  vs.  Dodge. 

(k)  By  differences  in  the  valuation  of  different  classes  of  personalty. 
Nat.  Bank  of  Baltimore  vs.  Baltimore,  40  c.  c.  a.  254,  100  Fed. 
Rep.  24. 

IV.    The  present  burden  of  taxation  on  the  banks. 

The  taxes  paid  by  all  the  banks  in  California  amounted  in  1905  to 
$721,426.67,  which  was  less  than  6-10  of  1%  on  their  capital,  including 
in  the  capital  the  accumulated  surplus  and  undivided  profits.  Those 
paid  by  State  commercial  banks  amounted  to  $383,732.75,  or  less  than 
8-10  of  1%  on  their  capital.  Those  paid  by  the  savings  banks  amounted 
to  $263,984.91,  or  about  1%%  on  their  capital.  The  national  banks  paid 
only  $73,709.01,  or  a  little  over  2-10  of  1%  on  their  capital.     These 


236  REPORT   OF    COMMISSION   ON   REVENUE   AND    TAXATION. 

amounts  are  exclusive  of  the  taxes  on  mortgages,  which  although 
sdvanced  by  the  banks  are  not  borne  by  them,  being  invariably  shifted 
tc  the  mortgagor.  They  include  only  taxes  paid  and  borne  by  the 
banks. 

The  burden  of  these  taxes  falls  on  the  stockholders  of  the  banks, 
whose  dividends  are  lessened  thereby.  Their  payment,  even  in  the 
case  of  savings  banks,  does  not  affect  the  rate  of  interest  paid  on  loans 
or  deposits,  that  being  fixed  entirely  by  competition. 

These  taxes  are  too  low,  considering  the  nature  of  bank  capital  and  its 
earnings.  They  are  lower  than  those  on  other  property  taxed,  or  on 
investments  of  a  like  character.  Bank  stock,  generally  speaking,  stands 
high  as  an  investment.  It  is  regarded  as  safe  and  respectable,  and  is 
usually  remunerative.  It  is  readily  salable,  and  usually  commands  a 
high  premium.  The  capital  invested  in  banking  is  money,  and  so  long 
as  the  bank  is  solvent  is  worth  dollar  for  dollar.  The  shares  which 
represent  the  capital  are  in  most  cases  worth  more  than  their  "book 
value. '  '*  The  book  value  of  the  stock  of  the  Bank  of  California  is  reported 
by  the  Bank  Commissioners  in  their  last  published  report  as  $334;  its 
market  value  was  about  $425,  according  to  the  last  quotations.  The  book 
value  of  the  stock  of  a  certain  interior  savings  bank  was  $65.80  ;  the  market 
value,  it  was  claimed,  was  $500,  but  as  sales  do  not  often  take  place  the 
market  value  is  rather  indeterminate.  In  another  case,  the  stock  of  a 
national  bank  in  one  of  the  bay  cities  outside  of  San  Francisco  had  a  book 
value  of  about  $175  and  was  firmly  held  at  $300.  Just  exactly  what  the 
market  value  of  a  share  of  stock  in  a  given  bank  may  be  is  not  always  easy 
to  determine.  Except  in  the  case  of  a  very  few  banks  in  large  centers, 
the  stock  is  not  quoted  "on  exchange."  Usually  bank  stock  is  closely 
held,  and  outsiders  are  "let  in"  more  or  less  as  a  personal  favor  or  to 
strengthen  the  bank  by  adding  to  its  prestige  or  to  reach  a  new 
clientage.  Sales  are  rare  and  are  not  often  given  publicity.  But  it 
is  indisputable  that  except  in  the  case  of  new  banks  or  of  notoriously 
weak  ones,  the  market  value  of  the  stock  is  above  the  ' '  book  value. ' ' 

The  earnings  of  bank  stock  in  California  are  high.  The  following 
table  has  been  compiled  from  the  reports  of  the  Controller  of  Currency, 
and  shows  the  earnings  of  national  banks  in  several  states.  It  will 
serve  the  double  purpose  of  showing  the  lucrative  character  of  bank 
stock  as  an  investment  and  of  affording  a  comparison  between  the 
burden  of  taxation  on  banks  in  California  and  in  other  states,  with 
whose  system  of  taxation  we  wish  later  to  make  comparison. 

*The  "book  value"  of  a  share  of  bank  stock  is  determined  by  adding  together  the 
amount  paid  in  per  share  and  its  pro  rata  of  the  amount  of  the  accumulated  surplus 
and  undivided  profits.  It  is  the  amount  which  in  case  of  voluntary  liquidation 
would  be  paid  the  shareholders  for  each  share. 


REPORT   OP    COMMISSION   ON   REVENUE   AND   TAXATION. 


237 


Comparative  Statement  of  the  Percentages  of  Semi-Annual  Net  Earnings  to  Capital  and 
Surplus  of  National  Banks  in  Certain  States. 

(Computed  from  the  Reports  of  the  Controller.) 


Year. 

California. 

Connecticut. 

* 

New  York. 

Pennsyl- 
vania. 

Wisconsin. 

New  York 
City. 

1900 

4.84 
6.15 

3.42 
3.26 

5.47 

8.38 

4.87 
5.37 

5.24 
6.35 

6.37 
10.32 

1901             

5.20 
5.19 

3.34 
3.04 

4.31 
5.03 

4.55 
4.41 

5.42 

5.58 

4.57 

5.95 

1902  •— 

6.06 
5.48 

3.10 
3.04 

11.32 
5.27 

4.44 

4.78 

6.38 
5.30 

14.40 

5.61 

1903 

6.61 
5.57 

3.36 
3.10 

5.68 
5.69 

5.15 
4.69 

5.53 
5.51 

5.97 
6.26 

1904     

6.18 
5.17 

3.16 
2.80 

7.86 
4.48 

4.30 
4.33 

5.98 
5.31 

9.04 

4.64 

1905            

5.47 
4.72 

2.41 
3.06 

4.14 
4.44 

4.43 
4.16 

5.05 

4.87 

4.05 

4.49 

Comparative  Statement  of  the  Three-Yearly  and  Six-Yearly  Averages  of  the  Percent- 
ages of  Semi-Annual  Net  Earnings  to  Capital  and  Surplus  of  National  Banks  in 
Certain  States.  ^^  ^^  igQ^ 

California 5-48  5-62  5553 

Connecticut 3.20  2.98  3.09 

New  York 6.63  5.38  6.005 

Pennsylvania 4.73  4.51  4.62 

Wisconsin 5-71  5.37  5.54 

N.  B. — Double  these  percentages  will  give  the  annual  net  earnings. 

It  will  be  noted  that  the  average  net  earnings  of  national  banks  in 
California  are  over  11%  per  annum,  on  all  that  the  stockholder  has 
invested ;  that  this  rate  is  exceeded  by  New  York  only,  all  other  states 
in  the  list  being  lower.  The  high  average  rate  in  New  York  is,  how- 
ever, somewhat  anomalous,  being  caused  by  the  extraordinarily  high 
earnings  of  banks  in  New  York  City  in  the  second  half  of  1900  and  in 
the  first  half  each  of  1902  and  1904.  Eliminating  these,  which  are 
obviously  exceptional— 14.4%  semi-annually,  or  at  the  rate  of  28.8%> 
per  annum  may  be  called  very  remarkable— California  would  be  above 
the  average  even  for  New  York  City.  The  country  banks  in  New  York 
earned  an  average  of  4.056%  semi-annually  during  the  six  years;  banks 
in  Brooklyn  4.009%,  in  Albany  3.705%. 

It  follows  from  this  showing  that  bank  stocks  in  California  constitute 
a  lucrative  investment.  Incidentally,  it  may  be  pointed  out  that  Cali- 
fornia banks  can  well  afford  to  pay  at  least  as  high  taxes  as  are  paid 
by  banks  in  other  states.  This  will  be  considered  in  connection  with  the 
determination  of  the  rate. 

We  have  do  adequate  data  on  the  earnings  of  banks  in  California  other 
than  the  national  hanks.    The  returns  of  the  Bank  Commission  do,  how- 


238  REPORT   OP   COMMISSION   ON   REVENUE  AND   TAXATION. 

ever,  show  the  dividends  declared  on  stock  for  56  out  of  the  96  savings 
banks.  The  dividends  are  considerably  less  than  the  net  earnings,  as 
in  most  cases  some  money  was  carried  to  surplus.  But  on  the  other 
hand  the  rate  of  dividends  quoted  is  the  rate  on  the  capital  paid  up 
and  does  not  take  cognizance  of  the  surplus.  The  figures  are,  therefore, 
not  very  satisfactory.  They  indicate  an  average  of  about  8y2%  for 
the  rate  of  dividends  declared.  The  following  table  shows  the  dis- 
tribution : 

Dividends  Paid  on  Savings  Bank  Stock— California,  1905. 

7  banks  paid  less  than  - 5% 

6  banks  paid 5%  and  less  than    6% 

14  banks  paid 6%  and  less  than    7% 

3  banks  paid 7%  and  less  than    8% 

5  banks  paid ---  8%  and  less  than    9% 

10  banks  paid 10% 

5  banks  paid.. 12% 

6bankspaid 20%  or  over.* 

56  banks  paid  an  average  of ■  --  8J% 

Banks  are  located  in  cities.  The  average  tax  rate  for  California  cities 
for  1905  has  been  determined  by  this  Commission  to  be  $2.55  per  $100 
of  assessed  valuation.  This  is  the  average  of  all  revenues  from  taxation 
to  the  total  assessed  valuation.  The  rates  range  from  $1.55  to  $4.05. 
The  rates  in  some  of  the  larger  cities  were: 

San  Francisco --- H  654 

Los  Angeles 2  30 

Oakland 2  66 

Sacramento --   - 3  60 

Stockton 2  90 

San  Diego 3  10 

Santa  Cruz ----  3  90 

The  above  average,  $2.55,  was  pulled  down  by  the  low  rate  in  San 
Francisco. 

Real  estate  in  cities  is  assessed  for  purposes  of  taxation  at  about  60% 
of  its  value.  The  taxes  on  real  estate  are,  therefore,  about  1.56%  on  the 
true  value.  It  was  found,  as  above  stated,  that  the  taxes  paid  by  the 
State  commercial  banks  averaged  -&  of  1%  of  the  book  value  of  the 
stock.  The  book  value  is  below  the  true  or  market  value;  how  much 
below  can  not  be  ascertained.  Conceding,  for  the  moment,  what  has 
been  strongly  urged  by  the  banking  interests,  that  the  excess  of  market 
value  over  book  value  represents  the  value  of  the  "  good  will,"  and 
conceding  further  that  "  good  will "  is  not  taxed  in  the  case  of  other 
business  enterprises  and  should  perhaps  not  be  taxed  against  the  banks, 

*1  bank  paid  25%  and  carried  50%  more  to  surplus.  This  bank  has,  however,  only 
$20,000  capital  and  nearly  three  quarters  of  a  million  deposits,  an  extraordinarily  low 
ratio  of  capital  to  deposits. 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  239 

it  is  still  obvious  that  'the  taxes  paid  by  the  banks  are  too  low.  To 
make  the  owners  of  bank  shares  pay  taxes  at  the  same  rate  as  the 
owners  of  real  estate  do  pay,  the  taxes  on  the  banks  should  be  increased 
at  the  very  least  in  the  ratio  of  80  :  153,  or  about  90%.  This  estimate 
rests  on  the  two  concessions  made  above.  If  those  concessions  are 
denied  the  increase  should  be  much  greater. 

It  will  be  observed  that  savings  banks  are  already  taxed  at  about  the 
same  rate  as  is  real  estate,  which  was  to  have  been  anticipated  from  the 
analysis  of  the  items  entering  into  the  assessment.  Their  taxes  are  not 
too  low. 

The  above  comparison  is  between  bank  stock  and  real  estate.  This  is 
practically  the  only  comparison  possible,  as  there  is  no  other  class  of 
propertv  universally  taxed.  Only  15%  of  the  entire  assessment  roll  is 
made  up  of  items  other  than  real  estate.  There  is  no  impropriety  in 
such  a  comparison,  as  bank  stock  and  real  estate  are  much  on  a  par  as 
investments. 

V.    Incongruities  and  special  hardships  in  our  present  system  of 
taxing-  banks. 

Our  present  system  of  taxing  banks  imposes  certain  hardships  upon 
them  which  carry  no  corresponding  benefits  to  the  government  and 
which  are  against  good  banking  principles  and  public  policy.  The 
same  hardships  are  felt  by  insurance  companies  and  all  financial 
concerns. 

The  most  conspicuous  of  these  is  the  restriction  of  the  field  for 
investment.  The  stocks  and  bonds  of  foreign  corporations,  if  held  or 
owned  in  California  on  the  first  Monday  in  March,  are  taxable.  The 
stocks  and  bonds  of  California  corporations  are  not  taxable  as  the 
corporations  themselves  are  taxed.  The  result  is,  that  California  banks 
are  restricted  in  their  investments  and  loans  to  the  stocks  and  bonds  of 
California  corporations.  This  is  bad  banking,  because  it  makes  the 
banks  largely  dependent  for  their  solvency  on  the  prosperity  of  a  single 
locality;  because,  further,  in  times  of  special  stress,  the  banks  are  loaded 
with  securities  for  which  there  is  a  very  limited  market;  namely,  Cali- 
fornia only.  That  is,  supposing  there  were  a  financial  stringency  in 
California,  the  banks  could  be  relieved  only  by  selling  California 
securities  (all  that  they  are  permitted  to  hold)  in  California,  right 
where  the  supposed  stringency  exists.  The  result  would  inevitably  be 
to  depress  the  values  of  these  securities  still  further.  This  policy  in 
turn  has  restricted  and  limited  the  market  for  the  stocks  and  bonds  of 
California  corporations,  because  these  securities,  being  sought  by  Cali- 
fornia capital  (perforce,  being  forbidden  to  go  elsewhere),  have  little 
chance  of  getting  into  the  larger  markets.  In  turn,  again,  this  tends 
to  keep  foreign  capital  out  of  California,  as  well  as  to  keep  California 


240  REPORT   OF    COMMISSION   ON    REVENUE   AND    TAXATION. 

capital  at  home.  It  is  a  system  which  tends  to  force  everybody  to 
deposit  his  eggs  in  the  one  basket,  and  to  increase  the  chances  of  their 
being  broken. 

It  is  the  unanimous  opinion  of  all  those  who  are  well  informed  on 
these  conditions  that  the  banks  could  easily  afford  to  pay  more  taxes  if 
freed  from  these  hampering  conditions  on  their  power  to  invest. 

There  are  two  ways  in  which  this  unfortunate  condition  might  be 
remedied.  One  way  would  be  to  declare  generally  that  the  stocks  and 
bonds  of  foreign  corporations  when  held  or  owned  in  California  are  not 
taxable.  There  is  much  to  be  said  in  favor  of  such  a  polic}'.  But  this 
Commission  is  not  prepared  to  go  to  the  length  of  recommending  it. 
The  second  and  better  way  is  to  levy  a  tax  on  banks,  insurance  com- 
panies, and  other  similar  financial  institutions,  which  shall  in  itself  be 
fair,  and  then  to  make  that  tax  in  lieu  of  all  other  taxes.  This  would 
give  the  banks  absolute  freedom  in  their  investments  and  bring  much 
foreign  money  into  the  State. 

Another  unfortunate  feature  of  our  present  law  is  the  large  amount 
of  discretion  left  to  the  assessor.  The  banks  are  completely  at  the 
mercy  of  that  officer.  The  banks  do  not  like  it,  and  in  most  cases  the 
assessor  does  not  enjoy  the  situation  either.  As  there  are  fifty-seven 
assessors  in  the  State  there  are  practically  fifty-seven  standards  for  the 
assessment  of  banks.  This  causes  inequalities.  Running  through  our 
files  of  reports  of  State  commercial  and  savings  banks  quite  at  random 
we  find  one  bank  taxed  at  T^5T  of  1%  on  its  capital,  another  at  T^-  of 
1%,  and  another  at  1|%.  Such  inequalities  as  these  area  severe  handi- 
cap to  any  business;  to  the  banker  it  is  especially  annoying. 

The  remedy  for  this  is  to  takeaway  from  the  assessors  the  duty  of  valu- 
ing the  assets,  and  especially  the  franchises,  of  the  banks;  to  administer 
the  entire  taxation  of  banks  from  Sacramento,  and  to  devise  a  tax  which 
can  be  applied  by  a  mathematical  rule  with  as  little  scope  for  the  exer- 
cise of  "  discretionary  power  "  as  possible.  What  the  bankers  need  is  a 
tax  which  shall  be  uniform  throughout  the  State  and  uniform  in  its 
operation  from  year  to  year. 

B.     THE  TAXATION  OF  BANKS  IN  OTHER  STATES. 

The  methods  used  for  the  taxation  of  banks  in  other  states  are,  in 
the  main,  those  suggested  or  prescribed  by  the  Federal  statutes  and  the 
Federal  courts  for  the  taxation  of  national  banks. 

As  has  been  shown  above,  the  Federal  statutes,  as  interpreted  by  the 
courts,  lay  down  very  narrow  limits  within  which  the  states  must  confine 
their  efforts  at  the  taxation  of  national  banks.  In  all  those  states  where 
the  national  banking  system  has  predominated  the  law  relating  to  the 
taxation  of  banks  of  all  classes  has  gradually  been  brought  into  con- 
formity with  the  provisions  of  the  national  law. 


REPORT   OP   COMMISSION   ON   REVENUE   AND   TAXATION.  241 

In  every  State  in  the  Union,  except  California  and  Nevada,  banks 
are  taxed  by  laying  a  tax  on  the  shares  of  bank  stock  assessed  to  the 
shareholders,  or  by  a  method  substantially  equivalent  thereto.  Only 
California  and  her  nearest  neighbor,  Nevada,  cling  to  the  old-fashioned 
property  tax  as  far  as  banks  are  concerned. 

Illustrative  citations  from  the  laws  of  other  states  in  regard  to 
the  taxation  of  banks. 

The  differences  in  the  practice  of  different  states  are  mainly  as  to 
the  basis  of  valuation.  It  is  a  choice  between  the  assessment  of  shares 
of  stock,  at  the  so-called  "cash  or  market  value,"  or  at  the  "book 
value,"  or  at  "the  same  rate  as  other  personal  property,"  in  every  case 
with  an  allowance  for  any  property  such  as  real  estate  assessed  and 
taxed  to  the  bank.  One  State,  namely,  Wyoming,  assesses  stock  at  par 
value.  The  only  other  diferences  in  the  practice  are  as  to  whether  the 
stock  is  assessed  where  the  shareholder  resides  or  at  the  place  where 
the  bank  is  located.  The  following  citations  from  the  laws  of  other 
states  will  illustrate  the  methods  and  show  the  differences,  which  are, 
however,  comparatively  unimportant.  It  will  be  noted  how  closely 
they  follow  the  phraseology  of  the  National  Bank  Act: 

Connecticut. 

Sec.  2331.  The  secretary,  treasurer,  or  cashier  of  every  bank,  national  banking 
association,  trust,  insurance,  investment,  and  bridge  company,  whose  stock  is  not 
exempt  from  taxation,  shall  annually  file  in  the  office  of  the  tax  commissioner  of  this 
State  a  statement  under  oath,  showing  the  number  of  shares  of  its  capital  stock  and 
the  market  value  thereof  on  the  first  day  of  October,  the  name  and  residence  of  each 
stockholder,  and  the  number  of  shares  owned  by  each  on  said  last  named  date ;  and, 
on  or  before  the  last  day  of  the  following  February,  each  of  the  corporations  afore- 
said shall  pay  to  the  treasurer  of  this  State  a  tax  of  one  per  centum  on  the  market 
value  of  each  share  of  its  stock — less  the  amount  of  taxes  paid  by  such  corporation 
upon  its  real  estate  in  Connecticut  during  the  year  ending  on  the  first  day  of  said 
February.      *      *      * 

Sec.  2833.  On  or  before  the  fifteenth  day  of  April  in  each  year  the  treasurer 
of  the  State  shall  remit  to  the  treasurer  of  each  town  in  the  State  *  *  *  the 
amount  of  the  tax  received  as  aforesaid  upon  such  shares  of  the  capital  stock  of 
any  of  the  aforesaid  corporations  as  were,  on  the  first  day  of  October  of  the  preced- 
ing year,  owned  by  persons  who  resided  or  corporations  which  were  located  in  such 
town.  *  *  *  The  tax  derived  from  the  shares  of  any  national  banking  association 
located  in  this  State,  which  were  on  the  first  day  of  the  preceding  October  owned 
by  non-residents  of  this  State,  shall  be  paid  over  to  the  treasurer  of  the  town  within 
which  such  banking  association  is  located. 

Virginia. 

SEC,  17.  No  tax  shall  be  assessed  upon  the  capital  stock  of  any  bank  or  banking- 
association  organized  under  the  authority  of  this  State  or  of  the  United  States,  nor 
upon  the  capital  of  any  trust  or  security  company  chartered  by  this  State,  but  the 
stockholders  in  such  banks,  banking  associations,  trust  and  security  companies  shall 
,be  assessed  and  taxed  on  the  market  value  of  their  shares  of  stock  therein.  Each 
bank  *  *  *  shall  make  up  and  return  to  the  commissioner  of  the  revenue  of 
the  county,  city  or  town,  or  district  in  which  said  bank,  banking  association,  trust 

16  — RT 


242  REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 

or  security  company  is  located,  a  report,  in  which  shall  be  given  the  names  of  the 
stockholders,  their  residences,  the  number  of  shares  owned  or  held  or  controlled  by 
each,  and  the  market  value  of  said  stock.  From  the  total  market  value  of  the 
shares  of  stock  of  any  such  bank  *  *  *  there  shall  be  deducted  the  assessed 
value  of  its  real  estate  otherwise  taxed  in  this  State,  and  the  value  of  each  share 
of  stock  shall  be  its  proportion  of  the  remainder ;  provided,  that  the  market  value 
of  said  stock  shall  be  estimated  at  a  sum  not  less  than  the  aggregate  of  the  capital, 
surplus,  and  undivided  profits  of  each  bank,  banking  association,  trust  and  security 
company,  as  shown  by  its  last  published  statement  prior  to  the  first  of  February  of 
each  year,  after  deducting  from  such  aggregate  the  value  of  its  real  estate  otherwise 
taxed  in  this  State.     *     *     * 

Sec.  18.  It  shall  be  the  duty  of  said  commissioner  of  the  revenue,  as  soon  as  he 
receives  such  report,  to  assess  each  stockholder  upon  the  market  value  of  the  shares 
of  stock  owned  by  him  a  tax  of  twenty-five  cents  on  every  hundred  dollars  value 
thereof,  the  proceeds  of  which  shall  be  applied  to  the  support  of  the  government,  and 
a  further  tax  of  ten  cents  on  every  hundred  dollars'  value  thereof,  which  shall  be 
applied  to  the  support  of  the  public  free  schools  of  the  State.     *     *     * 

Indiana. 

Sec.  60.  The  shares  of  capital  stock  of  any  bank,  banking  association,  or  trust 
company  located  within  this  State,  whether  organized  under  the  laws  of  this  State 
or  of  the  United  States,  shall  be  assessed  to  the  bank,  banking  association,  or  trust 
company  in  the  township,  city,  or  town  where  such  bank,  banking  association,  or 
trust  company  is  located,  and  shall  be  taxed  at  the  same  rate  as  other  property  in 
the  same  locality  is  taxed,  and  with  reference  to  its  value  on  the  first  day  of  March 
of  the  current  year. 

Sec.  61.  *  *  *  The  assessor  shall  determine  and  settle  the  true  cash  value 
of  each  share  of  stock,  after  an  examination  of  such  statement,  and  also  an 
examination  under  oath  of  such  officer  if  he  deem  it  necessary ;  and  in  determining 
and  fixing  the  true  cash  value  of  each  of  said  shares  of  stock,  he  shall  be  governed 
by  the  market  or  usual  selling  price  of  such  stock  at  private  sale  at  the  place  where 
the  bank  is  located;  and,  if  there  is  no  market  value,  he  shall  determine  the  actual 
value,  taking  into  consideration  the  surplus  and  undivided  profits,  if  any,  just  as 
he  would  with  respect  to  other  moneyed  capital  in  the  hands  of  individual  citizens 
of  the  State. 

Massachusetts. 

Sec.  9.  All  the  shares  of  stock  in  banks,  whether  of  issue  or  not,  existing  by 
authority  of  the  United  States  or  of  the  commonwealth,  and  located  within  the  com- 
monwealth, shall  be  assessed  to  the  owner  thereof  in  the  city  or  town  in  which  such 
bank  is  located,  and  not  elsewhere,  in  the  assessment  of  State,  county  and  town 
taxes,  whether  such  owner  is  a  resident  of  said  city  or  town  or  not.  They  shall  be 
assessed  at  their  fair  cash  value  on  the  first  day  of  May,  first  deducting  therefrom 
the  proportionate  part  of  the  value  of  the  real  estate  belonging  to  the  bank,  at  the 
same  rate  as  other  moneyed  capital  in  the  hands  of  citizens  is  by  law  assessed. 
*      *      * 

[The  rest  of  the  law  refers  to  the  complicated  method  of  distributing  the  taxes  so 
collected  to  the  towns  where  the  shareholders  reside.  The  taxes  on  shares  of  non- 
resident stock  are  retained  by  the  State.] 

Pennsylvania. 

Sec.  1.  *  *  *  Every  bank  or  savings  institution  having  capital  stock,  incor- 
porated by  or  under  any  law  of  this  commonwealth  or  under  any  law  of  the  United 
States,  and  located  within  this  commonwealth,  shall  *  *  *  make  to  the  auditor- 
general  a  report  *  *  *  setting  forth  the  full  number  of  shares  of  the  capital 
stock  subscribed  for  or  issued  by  such  bank  or  savings  institution,  and  the  actual 
value   thereof,   which   shall   be   ascertained   as   hereinafter   provided;    whereupon    it 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  243 

shall  be  the  duty  of  the  auditor-general  to  assess  such  shares  for  taxation  at  the 
same  rate  as  that  imposed  upon  other  moneyed  capital  in  the  hands  of  individual 
citizens  of  the  State,  that  is  to  say,  at  the  rate  of  four  mills  upon  each  dollar  of 
the  actual  value  thereof,  the  actual  value  of  each  share  of  stock  to  be  ascertained 
and  fixed  by  adding  together  the  amount  of  capital  stock  paid  in,  the  surplus  and 
undivided  profits,  and  dividing  this  amount  by  the  number  of  shares.  *  *  *  And 
provided  further,  that  in  case  any  bank  or  savings  institution  having  capital  stock, 
incorporated  under  the  laws  of  this  State  or  of  the  United  States,  shall  collect 
annually,  from  the  shareholders  thereof,  said  tax  of  four  mills  on  the  dollar  upon 
the  actual  value  of  all  the  shares  of  stock  of  said  bank  or  savings  institution, 
*  *  *  and  pay  the  same  into  the  State  treasury  on  or  before  the  first  day  of 
March  in  each  year,  the  shares  and  so  much  of  the  capital  and  profits  of  such  bank 
or  savings  institution  as  shall  not  be  invested  in  real  estate,  shall  be  exempt  from 
local  taxation  under  the  laws  of  this  commonwealth.  *  *  *  Except,  however, 
that  any  bank  or  savings  institution  incorporated  as  aforesaid,  in  lieu  of  the  method 
hereinbefore  set  out  for  ascertaining  the  actual  value  of  the  shares  of  capital  stock, 
may  elect  to  collect  annually  from  the  stockholders  thereof  a  tax  of  ten  mills  on 
the  dollar  upon  the  par  value  of  all  shares  of  said  bank  that  have  been  subscribed 
for  or  issued,  and  pay  the  same  into  the  State  treasury  on  or  before  the  first  day  of 
March  in  each  year ;  and  the  shares  of  such  bank  or  savings  institution,  and  so 
much  of  the  capital  and  profits  of  such  bank  or  savings  institution,  as  shall  not  be 
invested  in  real  estate,  shall  be  exempted  from  local  taxation  under  the  laws  of 
this  commonwealth. 

[The  last  is  the  method  preferred  by  the  banks.] 

Illinois. 

Sec.  35.  The  stockholders  in  every  bank  located  within  this  State,  whether  such 
bank  has  been  organized  under  the  banking  laws  of  this  State  or  of  the  United 
States,  shall  be  assessed  and  taxed  on  the  value  of  their  shares  of  stock  therein,  in 
the  county,  town,  district,  village,  or  city  where  such  bank  or  banking  association 
is  located,  and  not  elsewhere,  whether  such  stockholders  reside  in  such  place  or  not. 
Such  shares  shall  be  listed  and  assessed  with  regard  to  the  ownership  and  value 
thereof,  as  they  existed  on  the  first  day  of  May,  annually ;  subject,  however,  to  the 
restriction  that  taxation  of  such  shares  shall  not  be  at  a  greater  rate  than  is 
assessed  upon  any  other  moneyed  capital  in  the  hands  of  individual  citizens  of  this 
State,  in  the  county,  town,  district,  village,  or  city  where  such  bank  is  located.  The 
shares  of  capital  stock  of  national  banks  not  located  in  this  State,  held  in  this 
State,  shall  not  be  required  to  be  listed  under  the  provisions  of  this  act. 

New  York. 

Sec.  24.  In  assessing  the  shares  of  stock  of  banks  or  banking  associations 
organized  under  the  authority  of  this  State  or  of  the  United  States,  the  assessment 
and  taxation  shall  not  be  at  a  greater  rate  than  is  made  or  assessed  upon  other 
moneyed  capital  in  the  hands  of  individual  citizens  of  this  State.  The  value  of 
each  share  of  stock  of  each  bank  and  banking  association,  except  such  as  are  in 
liquidation,  shall  be  ascertained  and  fixed  by  adding  together  the  amount  of  the 
capital  stock,  surplus,  and  undivided  profits  of  such  bank  or  banking  association 
and  by  dividing  the  result  by  the  number  of  outstanding  shares  of  such  bank  or 
banking  association.  *  *  *  The  rate  of  tax  upon  the  shares  of  stock  of  banks 
and  banking  associations  shall  be  one  per  centum  upon  the  value  thereof,  as  ascer- 
tained and  fixed  in  the  manner  hereinbefore  provided,  and  the  owners  of  the  stock 
of  banks  and  banking  associations  shall  be  entitled  to  no  deduction  from  the  taxable 
value  of  their  shares  because  of  the  personal  indebtedness  of  such  owners,  or  for  any 
other  reason  whatsoever.  *  *  *  The  said  tax  shall  be  in  lieu  of  all  other  taxes 
whatsoever  for  State,  county,  or  local  purposes  upon  the  said  shares  of  stock,  and 
mortgages,  judgments,  and  other  choses  in  action  and  personal  property  held  or 
owned  by  banks  or  banking  associations  the  value  of  which  enters  into  the  value 
of  said  shares  of  stock,  shall  also  be  exempt  from  all  other  State,  county  or  local 
taxation. 


244  REPORT   OF    COMMISSION   ON   REVENUE   AND   TAXATION. 

C.     THE  PLAN  PROPOSED   BY  THIS   COMMISSION  FOR  THE  TAXATION  OF 

BANKS  IN  CALIFORNIA. 

The  plan  for  the  taxation  of  banks  proposed  by  this  Commission 

involves  the  following  points: 

1.  All  banks  and  all  moneyed  capital  shall  be  taxed  alike,  i.  e.,  in 
the  same  manner  and  at  the  same  rate. 

This  is  necessary  if  the  State  is  to  tax  national  banks  at  all.  The 
Federal  government  has  virtually  prescribed  this,  for  it  prohibits  the 
taxation  of  national  banks  unless  all  others  are  taxed  in  the  same 
manner  and  at  the  same  rate. 

2.  The  tax  shall  be  a  State  tax,  and  the  banks  shall  be  exempt  from 
all  other  taxes,  except  local  taxes  on  real  estate.     (See  6  below.) 

This  is  an  essential  part  of  the  general  scheme  for  the  separation  of 
State  from  local  taxation,  as  outlined  elsewhere. 

But  more  than  that,  it  is  essential  to  any  uniformity  in  the  adminis- 
tration of  the  revenue  law  in  regard  to  banks  and  to  equality  between 
the  banks. 

3.  The  tax  shall  be  based  upon  the  capital  of  the  banks,  including 
accumulated  surplus  and  undivided  profits.  The  tax  shall  be  assessed 
to  the  stockholders  and  paid  on  their  behalf  by  the  bank. 

This  provision  keeps  within  the  rules  of  the  Federal  government  in 
regard  to  the  taxation  of  national  banks.  No  other  plan  is  countenanced 
by  the  Supreme  Court  of  the  United  States. 

This  provision,  however,  is  eminently  just.  The  capital  of  a  bank, 
including  its  accumulated  siurplus  and  undivided  profits,  is  what  the 
stockholders  own.  They  do  not  own  the  deposits  in  any  economic  sense, 
although  in  a  strict  legal  sense  the  bank  is  the  owner  thereof  until  they 
are  demanded  and  withdrawn  by  the  depositors.  In  the  same  sense 
they  do  not  own  the  investments  made  by  the  bank  with  moneys  on 
deposit.  What  is  theirs,  indisputably,  and  would  be  given  them  in 
case  of  liquidation,  is  the  paid-up  and  unimpaired  capital  and  accumu- 
lated surpluses  or  profits. 

Inasmuch  as  the  Federal  courts  will  not  permit  us  to  tax  banks  in  any 
other  way  save  under  penalty  of  losing  all  taxes  from  national  banks, 
it  is  perhaps  unnecessary  to  discuss  the  relative  merits  of  other  systems 
or  methods.  But  as  this  is  a  point  on  which  there  has  been  much  dis- 
cussion, it  seems  necessary  to  make  a  special  defense  of  the  Commis- 
sion 's  view  that  capital  is  the  proper  basis  for  the  taxation  of  banks. 

Other  possible  bases  are :  First,  the  general  property  held  by  the  bank, 
with  the  same  deductions  that  are  allowed  other  taxpayers.  We  have 
this  system  now  and  it  fails— fails  utterly,  as  shown  above.     Second, 


REPORT    OF    COMMISSION    ON    REVENUE   AND    TAXATION.  245 

''the  aggregate  of  business  done,"  a  basis  recommended  by  Professor 
Adams.  This  would  be  measured  presumably  by  the  total  of  assets 
and  liabilities.  The  difficulty  here  would  be  in  fixing  a  rate  which 
would  be  equitable.  It  is  a  practically  untried  method  and  we  have 
no  precedent  to  guide  us.  Th  ird,  ' '  the  deposits. "  As  a  measure  of  the 
relative  importance  of  different  banks  this  would  prove  satisfactory. 
But  here  again  we  are  at  a  loss  for  a  just  method  of  fixing  the  rate. 
If  the  deposits  were  the  basis  and  the  ordinary  rates  were  applied,  the 
taxes  for  the  State  commercial,  savings,  and  private  banks  would 
amount  to  $8,400,000  as  against  $647,000  now  paid  or  against  the 
$844,000  called  for  by  the  Commission's  plan.  It  would  be  10%  of  the 
capital  of  the  banks,  and  would  ruin  them,  unless  they  could  make  the 
depositors  pay,  which  is  very  doubtful.  In  any  event  it  seems  a  dubious 
policy  to  make  the  banks  responsible  for  the  taxes  on  the  deposits,  even 
if  it  is  wise  to  undertake  to  tax  bank  deposits  at  all.  Some  other  rate 
would  have  to  be  chosen,  and  there  is  no  way  of  determining  what  that 
rate  should  be  without  reference  to  the  capital  or  some  similar  base 
which  might  as  well  be  chosen  in  the  first  place.  Fourth,  it  has  been 
suggested  that  earnings  might  be  the  basis  for  taxation.  As  a  bank  has 
no  gross  receipts  in  the  same  sense  as  a  railroad  or  a  manufacturing 
concern  has,  net  earnings  would  have  to  be  selected.  This  would  meet 
with  the  same  objections  that  lie  against  the  net  earnings  tax  on  rail- 
roads, and  which  are  stated  in  full  there.  The  people  would  never  be 
satisfied  to  exempt  a  bank  from  taxation  merely  because  it  made  no 
profits. 

These  are  all  the  bases  that  have  been  suggested,  and  as  none  of  them 
is  satisfactory  we  are  forced  back  to  the  capital. 

4.  The  shares  of  stock  shall  be  assessed  or  valued  at  their  "book 
value,"  or  the  amount  paid  in  thereon  plus  the  pro  rata  of  the  accumu- 
lated surplus  and  profits.     (For  deduction  of  real  estate  see  6  below.) 

Unless  the  bank's  capital  has  been  impaired  by  losses,  in  which  case 
it  is  the  universally  acknowledged  duty  of  the  stockholders  to  imme- 
diately make  good  the  loss,  or  failing  that  to  allow  the  bank  to  go  into 
liquidation,  the  stock  is  worth  at  least  its  book  value.  That  amount 
is  there  in  cold  cash  or  in  investments  readily  changeable  into  cash. 
This  is  the  minimum  value  of  bank  stock.  No  stockholder  would  sell 
his  shares  for  less,  any  more  than  he  would  sell  a  twenty-dollar  gold 
piece  for  less  than  $20.00. 

The  only  other  possible  basis  of  valuation  is  the  "market  value." 
Bank  stock,  especially  the  stock  of  some  of  the  stronger  banks,  some- 
times sells  for  more  than  its  "book  value."  The  elements  which  enter 
into  this  excess  of  market  value  over  book  value  are  mainly  of  the 
nature  of  "good  will,"  or  arise  therefrom.     This  excess  depends  pri- 


246  REPORT   OP   COMMISSION   ON   REVENUE   AND   TAXATION. 

marily  on  the  bank's  ability  to  earn  rich  dividends  and  to  lay  aside 
profits  to  add  to  the  capital.  A  bank's  ability  to  do  this  depends  in 
turn  largely  upon  the  character,  ability,  and  reputation  of  its  directors 
and  stockholders,  its  past  history,  dignity,  and  standing;  in  short,  on 
its  good  name. 

The  attempt,  under  an  interpretation  of  our  present  law,  to  tax  this 
asa"  franchise ' '  is  absurd.  It  assumes  that  the  State  has  bestowed  on 
the  bank  what  its  incorporators  have  really  created  for  themselves. 

A  part  of  this  excess  value  is  due  to  pure  sentiment.  Thus  one  rich 
man  sought  stock  in  a  large  and  famous  bank  "because  he  thought  the 
shares  would  look  well  in  the  inventory  of  his  property  after  death." 
He  paid  an  extra  price  for  his  vanity.  Another  part  of  the  excess  value 
is  due  to  the  practical  business  advantages  which  come  to  a  business  man 
from  being  associated  with  a  given  coterie  of  financiers.  A  man  will 
not,  without  decided  gain  being  offered  him,  sacrifice  his  connection 
with  a  bank  managed  by  a  group  of  men  high  in  the  business  world. 
Conversely,  a  man  will  gladly  pay  extra  to  be  admitted  to  the  group. 
It  helps  to  establish  his  standing  and  credit. 

Intangible,  personal,  and  unreal  as  this  excess  value  may  be,  it  cer- 
tainly exists.    Men  pay  for  it  frequently. 

This  Commission  decided  against  recommending  that  the  assessment 
be  on  market  value  and  chose  book  value  instead  for  the  following 
reasons : 

First — To  use  market  value  would  be  to  introduce  an  element  of 
uncertainty,  of  personal  judgment  into  the  assessment.  The  book  value 
is  a  positive  thing.  There  is  no  doubt  about  its  amount.  The  market 
value  fluctuates.  In  the  case  of  some  banks  whose  stocks  are  frequently 
quoted  on  the  stock  exchange  the  market  value  is  well  known.  In  the 
case  of  others,  whose  shares  seldom  change  hands,  it  is  not  so  well 
known,  and  may  be  difficult  to  determine.  In  most  cases  the  market 
value  of  bank  stock  is  a  matter  on  which  opinions  differ.  It  is  desirable, 
if  possible,  to  base  the  tax  on  some  element  which  facilitates  the  use  of 
a  mathematical  rule  without  dependence  on  anybody's  judgment. 

Second— It  is  not  customary  to  tax  the  "good  will"  of  mercantile 
cr  manufacturing  concerns,  and  by  using  book  values  we  should  be 
giving  the  banks  a  corresponding  abatement,  the  excess  value  being  akin 
to  good  will. 

Third— The  choice  of  book  value,  as  against  market  value,  is  a  matter 
which  concerns  primarily  the  equity  between  banks.  It  is  an  open 
question  whether  high  market  value  to  bank  stock  necessarily  indicates 
proportionately  high  ability  to  pay  taxes.  At  all  events  a  uniform  rate 
on  book  value  seems  to  impose  a  uniform  handicap  on  all  banks.  So 
far  as  the  revenue  is  concerned  it  is  a  mere  matter  of  rate.  Whether 
we  take  a  given  percentage  of  the  book  value  or  a  lower  percentage  of 


REPORT   OP    COMMISSION   ON   REVENUE   AND   TAXATION.  247 

market  value  is  merely  a  matter  of  mathematics ;  the  result  is  the  same, 
the  revenue  is  the  same. 

Fourth— The  increased  cost  of  the  central  administration  of  the 
system,  if  market  value  were  to  be  used,  would  very  nearly  offset  any 
probable  loss  in  revenue  from  the  use  of  the  book  value. 

The  main  thing  is  to  secure  a  system  at  once  simple,  effective,  uniform, 
and  as  nearly  just  as  any  system  of  taxation  can  be. 

5.  The  rate  shall  be  1%  on  the  book  value  of  the  shares,  less  real 
estate  taxed  locally. 

This  rate  was  first  arrived  at  in  the  following  manner :  As  nearly  as 
can  be  ascertained,  property  is  valued  for  purposes  of  taxation  at  about 
60%  of  its  full  cash  value.  Such  is 'the  uniform  practice,  although  not 
sanctioned  by  law.  The  average  State  and  county  rate  throughout  the 
State  appeared  to  be,  from  data  then  in  hand,  about  $1.65  per  $100  of 
assessed  value.  1.65%  of  60  is  the  same,  about,  as  1%  of  100,  or,  to  be 
exact,  is  99-100  of  1%.  Obviously  it  would  make  no  difference  to  any 
one  whether  we  took  60%  of  the  true  value  and  applied  1.65,  the  average 
rate,  to  that,  or  took  60%  of  the  rate  and  applied  that  to  the  true  value. 
Since  that  time  more  complete  information  has  shown  that  the  tax  rate 
used  was  too  low. 

After  this  rate  had  been  tentatively  arrived  at  by  the  Commission,  by 
the  process  of  reasoning  above  set  forth,  a  conference  was  held  between 
the  Commission  and  a  committee  representing  the  California  Bankers' 
Association.  The  committee  of  the  bankers  was  inclined  to  criticise  the 
•rate  as  too  high.  It  based  its  objections  on  the  ground  that,  in  its 
opinion,  mercantile  capital  was  not  assessed  as  high  as  60%  of  its  value. 
This  led  the  Commission  to  make  a  further  investigation  and  study  of 
the  rate.  This  resulted  in  the  discovery  that  a  mistake  had  been  made 
in  selecting  $1.65  as  the  rate.  Banks  are  located  in  cities,  and  the  average 
city  rate  for  the  entire  State  is  $2.55,  60%  of  which  is  $1.53.  The  Com- 
mission is  ready  to  admit  that  mercantile  capital  is  not  assessed  as  is 
real  estate.  Much  of  it  escapes  entirely,  many  stocks  of  goods  in  shops 
and  stores  are  only  formally  assessed.  But  the  Commission  is  not  ready 
to  admit  that  the  moneyed  capital  of  the  banks  is  at  all  comparable  with 
the  goods  and  wares  in  mercantile  enterprises.  We  are  of  the  opinion, 
as  suggested  above,  that  real  estate  is  much  the  fairer  basis  for  com- 
parison. At  all  events  it  is  the  only  class  of  property  that  is  universally 
taxed.  The  Commission  is  of  the  opinion  that  whatever  merit  there  may 
be  in  the  contention  above  referred  to  is  fully  conceded  when  the  rate 
is  reduced  from  $1.53  to  $1.00.  It  is  also  of  the  opinion  that  1%  is 
a  low  tax  on  a  business  that  is  making  over  10%  per  annum  clear  of 
all  expenses. 


248  REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 

In  further  support  of  their  objection  to  the  rate,  the  committee  of 
bankers  urged  that  California  banks  could  not  afford  to  pay  as  high 
taxes  as  the  banks  in  Eastern  States,  many  of  which  do  pay  1%  and 
ever  in  taxes.  This  contention  led  the  Commission  to  investigate  the 
earnings  of  banks  here  and  in  those  states  which  do  use  a  rate  as  high 
as  that  proposed.  The  table  given  above  (see  Section  IV  of  this  chapter) 
was  the  result.  It  was  found  that  the  earnings  were  higher  in  California 
than  in  those  other  states.  All  New  York  banks,  whether  the  rich  banks 
in  New  York  City,  or  the  comparatively  poorer  ones  in  the  country,  pay 
alike  1%  on  their  capital  and  surplus  without  deduction  for  real  estate 
taxed  locally.  This  would  be  equivalent  to  a  rate  of  $1,175  per  $100  in 
California.     The  rates  in  other  states  are: 

Connecticut,  1%  on  market  value  of  stock. 

Pennsylvania,  1%  on  par  value.  (There  are  other  options,  but 
that  is  the  most  favorable.) 

Wisconsin,  State  and  local  rates,  whatever  they  may  come  to, 
reported  to  be  about  $1.60,  on  a  valuation  made  by  the  assessor,  which 
several  banks  claim  is  the  full  value. 

It  seems,  then,  that  the  committee  of  bankers  was  mistaken  in  its 
contention  that  California  banks  could  not  afford  to  pay  as  high  taxes 
as  their  Eastern  colleagues. 

6.  All  real  estate,  including  mortgages,  belonging  to  the  banks,  shall 
be  taxed  locally  as  heretofore.  But  in  fixing  the  value  of  the  shares 
the  banks  shall  be  allowed  to  deduct  from  the  book  value  of  the  shares 
the  value,  as  assessed  for  county  purposes,  of  any  real  estate,  other 
than  mortgage  interests  therein,  upon  which  they  pay  local  taxes. 

This  again  is  copied  from  the  provisions  of  the  Federal  law.  But  its 
justice  is  so  obvious  that  it  requires  no  further  argument. 

As  the  banks  merely  advance  the  tax  on  the  mortgages,  recovering  it 
in  the  shape  of  higher  interest  from  the  mortgagors,  there  is  no  reason 
for  allowing  them  to  deduct  mortgages. 

7.  Private  banks  and  bankers  should  be  taxed  in  the  same  manner 
as  other  banks,  on  the  capital  employed  by  them  in  their  business. 

The  branchas  or  agencies  of  foreign  banks  present  a  special  problem. 
The  capital  of  these  banks  is  usually  assigned  by  the  head  office  to  the 
different  agencies  for  use  as  the  exigencies  of  the  business  require,  or 
as  opportunities  for  making  a  profit  present  themselves.  Most  of  these 
branch  banks  or  agencies  deal  largely  in  foreign  exchange.  This  was 
the  origin  of  their  business  and  the  reason  for  their  coming  here. 
Gradually  they  began  to  finance  the  movement  of  the  crops  and  the 
manufactures  which  gave  rise  to  the  bills  in  which  they  dealt,  and  as 


REPORT   OF   COMMISSION   ON   REVENUE  'AND   TAXATION.  249 

their  customers  often  wished  to  leave  balances  from  the  sale  of  bills  in 
their  hands,  they  gradually  came  to  take  deposits.  Some  of  them  do 
very  little  except  an  exchange  business.  Others  carry  large  deposits. 
It  would  seem  that  when  such  banks  carry  deposits  in  California  they 
should  assign  to  California  definitely  and  permanently  a  certain  pro- 
portion of  their  capital,  which  should  be  accounted  the  capital  of  the 
branch  and  left  as  security  for  the  deposits.  If  this  were  done  these 
banks  could  be  taxed  in  the  same  manner  as  other  banks.  It  would  seem 
to  be  a  desirable  amendment  to  our  banking  laws  to  require  that  a  due 
proportion  of  capital  should  be  held  in  California  by  every  bank  that 
desires  to  take  deposits  here. 

Barring  this,  there  are  two  courses  open.  One  is  to  base  the  tax  on 
that  proportion  of  the  total  capital  of  the  foreign  bank  which  the  de- 
posits here  are  of  the  total  deposits  of  all  branches  and  of  the  head  office. 
The  other  is  to  consider  the  average  amount  due  by  the  branch  to  the 
head  office  as  the  "amount  of  capital  used  in  this  State,"  and  base  the 
tax  on  that.  The  first  of  these  obviously  encounters  constitutional  diffi- 
culties and  could  not  be  used  except  with  the  voluntary  consent  of  the 
banks.  The  second  is,  however,  legal  and  is  perhaps  the  best  that  can 
be  done.     It  is  the  one  recommended  by  the  Commission. 

In  most  cases,  it  was  found,  by  inquiry,  that  1%  of  the  average 
amount  due  by  the  branch  to  the  head  office  would  raise  the  taxes  of 
these  foreign  banks  about  as  much  as  the  proposed  increase  on  domestic 
banks.  So  far  it  promises  to  be  satisfactory.  But  it  was  frankly 
pointed  out  to  the  Commission  by  the  bankers  engaged  in  this  line  of 
business  that  it  would  be  a  comparatively  easy  matter  for  the  foreign 
banks  to  so  arrange  their  business  that  their  local  loans  would  not 
exceed  their  local  deposits  and  to  require  no  advances  from  the  head 
office.  It  is  thought,  however,  that  the  profit  made  by  using  the  money 
here,  even  after  paying  1%  taxes  thereon,  would  be  enough  to  still  bring 
it  here  under  all  normal  business  conditions.  And  that  the  plan  of 
taxing  these  banks  on  the  amount  due  by  the  branch  to  the  head  office 
will  work  equitably.  But  if  our  banking  law  can  be  amended  so  as  to 
require  these  banks  to  keep  a  certain  amount  of  capital  here  it  would 
simplify  the  whole  problem. 

General  conclusion. 

The  Commission  claims  for  this  plan  of  bank  taxation  that  it  is 
simple  and  effective,  easy  of  administration,  just  and  equitable  as 
between  the  government  and  the  banks,  and  as  nearly  just,  considering 
the  unavoidable  imperfections  which  enter  into  every  scheme  of  taxa- 
tion, between  bank  and  bank  as  any  system  which  can  be  devised. 


250  REPORT   OP   COMMISSION   ON   REVENUE   AND   TAXATION. 

The  plan  proposed  by  the  Commission  raises  the  taxes  paid  by  the 
State  commercial  banks  on  the  average,  52.5%.  It  reduces  that  of  the 
savings  banks  by  2%  on  the  average.  It  raises  the  taxes  paid  by 
national  banks  over  fivefold,  which  was  to  be  expected,  as  they  pay 
taxes  now  on  real  estate  only.  It  raises  the  average  of  all  banks, 
including  the  fivefold  increase  on  national  banks,  by  nearly  67%. 

It  will  afford  the  State  a  revenue  of  $1,028,113  on  the  basis  of  the 
capital  as  it  was  in  1905 — an  amount  which  will  grow  larger  every 
year.     It  will  leave  the  cities  and  counties  a  revenue  of  about  $200,000. 


D.     STATISTICAL  INVESTIGATIONS  BY  THE  COMMISSION  IN  REGARD  TO 

THE  TAXATION  OF  BANKS. 

Early  in  its  work  the  Commission  undertook  to  collect  data  concern- 
ing the  taxation  of  banks.  An  examination  of  the  assessors'  rolls 
showed  that  it  would  be  difficult,  if  not  impossible,  to  get  the  necessary 
data  from  that  source.  The  assessments  were  not  usually  brought 
together  in  such  a  manner  as  to  be  easily  available.  It  would  be  a  long 
task  to  go  through  the  rolls  of  fifty-seven  counties  selecting  the  neces- 
sary items,  and  there  would  be  no  assurance  when  it  was  done  that  it 
would  be  complete. 

A  blank  form  of  inquiry,  a  copy  of  which  appears  below,  was  pre- 
pared and  was  sent  to  every  bank  in  the  State,  nearly  five  hundred  in 
all.  This  blank  purposely  avoided  all  questions  as  to  true  value  or  earn- 
ings which  might  give  rise  to  opposition  or  hesitancy  in  making  reply, 
and  omitted  the  items  usually  collected  by  the  Bank  Commission. 
Replies  came  back  slowly,  and  in  some  cases  as  many  as  five  letters  had 
to  be  written  before  a  reply  was  obtained.  Many  of  the  returns  were 
faulty,  containing  obvious  errors  and  contradictions.  Copies  of  these 
were  sent  back  for  correction,  in  some  cases  as  many  as  four  times, 
before  a  correct  statement  was  obtained.  In  all,  this  part  of  the  work 
involved  writing  over  1,200  letters. 

The  returns  were  then  tabulated  on  large  sheets,  which  are  preserved 
among  the  files  of  the  Commission  for  reference,  but  are  not  printed  in 
full,  as  they  are  too  voluminous.  The  summary  sheets  alone  would 
make  a  volume  of  eighty-four  octavo  pages. 

The  following  table  contains  the  more  significant  totals.  In  all  there 
were  included  419  banks,  which  is  the  number  of  banks  assessed  for 
taxes  March  1,  1905. 

The  capital  paid  up,  accumulated  surplus,  and  undivided  profits, 
also  contained  in  the  following  table,  were  compiled  from  the  report  of 
the  Bank  Commissioners: 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 


251 


Table  Showing  the  Assessed  Valuation  and  Taxes  Paid  by  Banks  in  California. 
Amount  of  Taxes  Imposed  on  Banks  by  the  Plan  of  the  Commission. 


Also  the 


Commercial. 

Savings. 

National. 

Totals. 

Number  of  banks  included 
in  this  compilation 

Assessed       valuation       on 
county  rolls,  1905  (exclu- 
sive of  mortgages) - 

Segregation  of  the  above: 

Real  estate.. 

Cash -  

Solvent  credits           

241 

$19,732,848  00 

$6,935,379  00 

6,470,372  00 

4,254,351  00 

249,013  00 

1,492,321  00 

302,532  00 

28,880  00 

$383,732  75 

$181,470  07 

188,775  66 

13,487  02 

$481,214  08 
104,030  68 

96 

$13,070,179  00 

$3,227,202  00 

3,637,743  00 

4,059,390  00 

1,409,023  00 

543,257  00 

180,849  00 

12,715  00 

$263,984  91 

$108,495  53 

143,116  68 

12,372  70 

$210,472  08 
48,408  03 

82 

$3,091,280  00 

$2,530,345  00 

166,199  00 

49,338  00 

6,250  00 

3,060  00 

213,016  00 

123,072  00 

$73,709  01 

$33,398  99 

38,299  18 

2,010  84 

$336,427  62 
37,955  17 

419 

$35,894,307  00 

$12,692,926  00 

10,274,314  00 

8,363,079  00 

Stocks  and  bonds    

1,664,286  00 

Franchises 

2,038,638  00 

Fixtures --  - 

Miscellaneous 

Taxes   paid   1905  (exclusive 
of  taxes  on  mortgages) 

Segregation  of  the  above: 

State  and  county  taxes 

City  taxes 

61)6,397  00 
164,667  00 

$721,426  67 

$323,364  59 
370,191  52 

Miscellaneous  taxes. - 

Amount  of  proposed  State 
tax  at  1%  on  capital  and 
surplus,  less  assessed  value 
of  real  estate                

27,870  56 
$1,028,113  78 

Amount  of  local  taxes  on 
real    estate    at    assumed 
average  of  new  local  rates 
ofl£% 

190,393  88 

Total  taxes  under  new  plan 

Per  cent  of  new  taxes  to  old. 

Taxes     advanced     by     the 
banks  on  mortgages 

$585,244  76 
152.51 

$217,521  08 

$258,880  11 
98.06 

$1,555,875  08 

$374,382  79 
507.92 

$8,982  36 

$1,218,507  66 
168.90 

$1,782,378  52 

252 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 


Copy  of  Circular  used  in  Collecting  Data  from  the  Banks. 

State  of  California, 

Report  of  the ,  at...  

(Insert  name  of  bank.)  (Town  or  city.) 

To  the  Commission  on  Revenue  and  Taxation  of  the  State  of  California. 


I.    Assessed  Valuation  of  Property  for  Purposes  of  Taxation. 
As  assessed  in  March,  1905. 


ITEMS. 

Assessed 
Valuation  for 

State  and 
County  Taxes. 

Assessed 

Valuation  for 

City  or  Town 

Taxes. 

1 .  Banking  house  (if  owned  by  and  assessed  to  the  bank) 

$ 

£.        $ 

2.  Real  estate,  other  than  banking  house: 

(a)  In  home  county $ . 

(6)  In  other  counties,  California  . .. 

XJ  o 

CO 

—  w 

og 

(c)   Outside  California -.  . _$ 

(Item  c  is  not  to  be  carried  into  main  column.) 
3.  Cash  on  hand..  

'.2  w 

>§ 

0>O 

4.  Solvent  credits  (less  deduction  for  debts  due  resi- 
dents of  California) 

5.  Stocks  and  bonds  (taxable) -. 

n-C    * 

6.  Franchise.. 

Ss    

7.  Office  furniture  and  fixtures    

£s 

8.  Any  other  items  subject  to  taxation  (specify): 

s2 "" 

»Q«fH 

w   03 

c£                       --    - 

(Savings  Ba7iks  will  please  report  here  the  assessed  value  of 
mortgages  taxed.) 

National  Banks  will  please  report  on  as  many  of  the 
above  items  as  apply;  also: 

9.  Assessed  valuation  placed  on  shares  of  stock  in  the 
bank  reporting* 

0)  u 

E  ° 

0g 

£< 

•3© 

Total  assessed  valuation 

$ 

H      $ 

*If  shares  were  not  assessed  in  1905,  please  report  last  assessment  made,  stating  year  when 
made. 


II.    Taxes  Levied  on  the  Foregoing  Assessment. 

N.  B. — This  is  to  include  both  the  first  and  second  installments,  to  wit:  those  pay- 
able not  later  than  the  last  Monday  in  November,  1905,  and  those  payable  not  later  than 
the  last  Monday  in  April,  1906. 


1.  State  and  county  taxes 

2.  Town  or  city  taxes 

3.  School  district,  irrigation  district,  or  other  similar  district  taxes  not 

included  in  the  above 

Total  taxes  for  the  year,  in  California. 


REPORT   OP   COMMISSION   ON   REVENUE   AND   TAXATION. 


253 


III.    All  Other  Taxes  for  the  Year. 
(July  1,  1905,  to  June  30,  1906.) 


Local  license  taxes -. 

Taxes  paid  in  other  States  (on  property  of  California  banks,  or,  in  the 
case  of  branch  banks  or  agencies,  on  property  considered  as  an  asset 
of  the  branch  or  agency;  this  does  not  call  for  taxes  paid  by 
branches  or  agencies  in  other  States,  nor  for  taxes  paid  at  home 
office  in  other  States) 

Taxes  paid  the  National  Government 

Aggregate  of  all  taxes 


We  certify  that  the  foregoing  statement  is  correct. 


. ,  President. 


- --,  Cashier. 

Notice.— Please  enclose  with  the  schedule  a  copy  of  your  last  published  statement  of  condition. 


254  REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 


CHAPTER  VII. 

TAXATION  Of  INSURANCE  COMPANIES. 


Present  taxes  are  not  uniform. 

Our  present  laws  relating  to  the  taxation  of  insurance  companies 
discriminate  in  favor  of  the  companies  of  certain  states  and  countries 
and  against  those  of  certain  other  states,  and  also  discriminate  between 
the  different  classes  of  insurance  companies.  The  Commission  has 
been  concerned  primarily  to  find  a  method  which  shall  remove  these 
discriminations.  It  believes  that  the  taxes  on  all  insurance  companies 
of  whatever  class,  or  state,  or  country,  should  be  as  nearly  uniform  as 
possible. 

Fire,  marine,  and  all  miscellaneous  insurance  companies  not  organ- 
ized under  the  laws  of  California,  other  than  life,  are  required  to  pay 
to  the  State  an  annual  tax  of  2%  on  the  amount  of  the  gross  premiums 
received  upon  business  done  in  the  State,  less  return  premiums,  rein- 
surance in  companies  authorized  to  do  business  in  this  State,  and  less 
losses  actually  paid  on  business  in  this  State. 

Life  insurance  companies,  not  organized  under  the  laws  of  California, 
are  required  to  pay  an  annual  tax  of  1%  on  the  amount  of  the  gross 
premiums  received  upon  business  done  in  this  State. 

As,  in  normal  years,  the  losses  paid  by  fire  insurance  companies 
which  they  are  allowed  to  deduct,  average  from  35%  to  50%  of  the  pre- 
miums, the  tax  on  fire  insurance  companies  is  roughly  the  equivalent 
of  the  tax  on  life  companies. 

It  is,  therefore,  approximately  correct  to  say  that  all  foreign  insur- 
ance companies  are  taxed  1%  of  gross  premiums. 

Domestic  companies,  both  fire  and  life,  are  taxed  under  the  general 
property  tax. 

These  taxes  have  a  specious  appearance  of  uniformity.  The  discrim- 
ination referred  to  arises  from  the  fact  that  the  above  rates  for  foreign 
insurance  companies  apply,  practically,  only  to  companies  organized 
under  the  laws  of  Connecticut,  New  Hampshire,  and  Minnesota,  which 
levy  less  than  the  above  taxes  on  California  companies  and  companies 
organized  under  the  laws  of  foreign  countries,  because  in  all  other  cases 
the  tax  is  regulated  by  the  so-called  retaliatory  law.  (Quoted  in  full 
in  Chapter  II  of  Part  II,  and  embodied  in  the  proposed  amendment  to 
the  Constitution.) 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  255 

Local  licenses. 

In  addition  to  the  above  State  taxes,  fire  insurance  companies 
especially,  and  to  a  lesser  extent  life  insurance  companies  also,  are  sub- 
ject to  local  licenses  in  some  of  the  various  counties,  cities,  and  towns 
in  which  they  do  business.     Agents  are  also  subject  to  local  licenses. 

The  following  city  licenses  were  found  for  fire  insurance  companies: 

Bakersfield.     For  each  agent,  $5  per  quarter. 
,  Benicia.    For  each  agent,  $2.50,  payable  quarterly. 

Berkeley.    For  each  agent,  $10  per  annum,  payable  quarterly. 

Corona.     For  each  agent  or  member  of  agency  firm,  $1.50,  payable  quarterly. 

Fort  Bragg.    For  each  agent,  $20,  payable  January  1. 

Fresno.     For  each  company,  $5,  payable  quarterly. 

Lincoln.     For  each  company,  $5.50. 

Livermore.     For  each  agent,  $28,  payable  quarterly. 

Long  Beach.     For  each  company,  $5. 

Los  Angeles.     For  each  company,  $1  per  month. 

Martinez.     For  each  company,  $1.50,  payable  quarterly. 

Orange.     For  each  company,  $4,  payable  January  2,  or  $1  quarterly. 

Pacific  Grove.    For  each  agent,  $3,  payable  quarterly. 

Pomona.     For  each  company,  $3  per  quarter. 

Riverside.     For  each  agent,  $6  per  quarter. 

Redlands.     For  each  agent,  75  cents  per  quarter. 

San  Bernardino.    For  each  agent,  $6,  payable  quarterly. 

San  Francisco  (city  and  county).  Each  agent  in  San  Francisco  is  required  to  pay  as 
follows  for  each  company  he  represents:  Those  doing  $50,000  or  more  of  business 
per  quarter,  $100  per  quarter ;  for  business  between  $25,000  and  $50,000,  $75  quarterly ;  for 
business  between  $10,000  and  $25,000,  $50  quarterly;  for  business  between  $5,000  and 
$10,000,  $25  quarterly ;  for  less  than  $5,000  of  business,  $10.  Fire  patrol,  about  1^%  on 
net  premiums,  payable  in  January  and  July.  Companies  are  also  liable  for  a  city  and 
county  tax  on  personal  property ;  statement  of  the  latter,  including  cash,  office  fur- 
niture, etc.,  must  be  made  to  assessor  on  the  first  Monday  in  March. 

San  Jose.     For  each  company,  $7.50,  payable  quarterly. 

San  Pedro.     For  each  agent,  $1,  payable  monthly. 

Santa  Cruz.    For  each  company,  $10,  payable  May  1. 

Sonora.     For  each  agent,  $3,  payable  quarterly. 

Vacaville.    For  each  agent,  $10,  payable  quarterly. 

Ventura.    For  each  company,  $4  per  annum,  payable  $1  per  quarter. 

Woodland.    For  each  agent,  $7.50  per  quarter,  payable  quarterly. 

The  following  extracts  from  a  letter  from  Mr.  W.  J.  Dutton  of  the 
Fireman's  Fund  Insurance  Company,  shows  how  these  licenses  affect 
the  fire  insurance  companies: 

Our  license  fees  in  26  towns  assessing  companies,  amount  to ... $216  50 

In  6  counties  assessing  companies - - - 91  00 

San  Francisco  graded  license  would  average  per  company  $100  to  $200  — or,  say.     150  00 

For  a  company,  if  in  every  town - $457  50 

The  total  assessment  for  licenses  in  — 

40  towns  assessing  agents  is.- $638  00 

3  counties  assessing  agents  is 8?  00 

$725  00 


256  REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 

This  is  an  aggregate  tax  against  an  agent,  which  if  divided  among 
his  companies,  is  not  therefore  heavy  on  each  company. 

In  many  cases  cities  not  having  any  adequate  information  as  to  the 
revenues  received  by  insurance  companies  have  levied,  or  attempted  to 
levy,  extortionate  or  nearly  confiscatory  licenses. 

The  necessity  for  central  or  state  control  of  taxation  for  insur- 
ance companies. 

Two  facts  stand  out  conspicuously  in  the  history  of  the  taxation  of 
insurance  companies  in  this  State.  The  first  is  the  absolute  necessity 
for  central  or  state  taxation.  The  local  assessors  on  the  one  hand,  and 
the  cities  and  towns  on  the  other,  are  unable  to  deal  with  this  class  of 
business  with  that  unity  of  administration  which  is  essential  to  any 
reasonable  system.  The  second  is  the  inadequacy  of  the  old-fashioned 
general  property  tax  to  reach  companies  which  annually  take  large 
sums  from  our  people,  but  which  with  very  few  exceptions  have  no 
taxable  resources  in  the  State. 

The  extent  of  the  insurance  industry. 

In  the  year  1904,  33  fire  insurance  companies  organized  under  the 
laws  of  fereign  countries  took  in,  in  premiums,  $4,188,188,  and  paid  out 
in  losses  $1,609,518,  thus  carrying  away  $2,600,000,  which  went  to 
stockholders  living  outside  the  United  States  and  to  the  agents  of  these 
stockholders  who  secured  the  business  for  them.  In  the  same  year, 
1904,  65  fire  insurance  companies  of  other  states  took  in,  in  premiums, 
$5,048,589,  and  paid  back  $1,883,373,  or  in  round  numbers  obtained 
$3,200,000  net  from  California  business,  all  of  which  went  to  the  stock- 
holders and  agents  of  companies  which  have  no  taxable  property  in  the 
State.  Life  insurance  companies  in  the  same  year  collected  over 
$11,000,000  and  paid  out  $3,120,000  in  California,  leaving  about 
$8,000,000,  of  which  a  part  went  to  the  stockholders  and  agents  of  the 
companies  and  a  part  went  to  the  reserve  funds  belonging  to  California 
policyholders.  But  most  of  this  $8,000,000,  the  amount  collected  in  a 
single  year — -all  of  it  in  fact,  less  agents'  commissions — goes  out  of  the 
State  for  investment  and  is  not  taxable  here  as  property. 

Here,  then,  is  an  industry  which  (deducting  what  is  returned  to 
policyholders,  or  $6,600,000)  earns  or  accumulates,  gross,  subject  only 
^o  expenses  of  operation,  $14,000,000  per  annum,  or  deducting  again  the 
equivalent  of  the  future  obligations  incurred,  or  say  $7,000,000,  earns 
about  $7,000,000  per  annum  net,  practically  all  of  which  goes  to  the 
stockholders  or  their  employes  and  agents,  who  together  constitute  the 
"company"  and  upon  whom  we  depend  for  the  reimbursement  of  losses 
from  fire  and  death. 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  257 

The  amount  of  taxes  paid  under  the  present  system. 

This  industry,  under  our  present  laws  will  pay  about  $200,000  per 
annum  in  taxes.  It  paid  in  1905,  before  the  great  fire,  $148,000.  In 
1906  there  will  be  no  revenue  from  those  fire  companies  which  are 
allowed  to  deduct  losses.  Fortunately  not  all  companies  are  allowed 
this  privilege,  which  under  the  retaliatory  law  extends  only  to  those 
companies  whose  states  allow  our  companies  that  privilege. 

As  shown  by  the  operation  of  our  retaliatory  laws,  only  three  states 
impose  less  taxes  on  insurance  companies  than  does  California.  It  is 
safe  to  say  that  few,  if  any,  states  impose  adequate  taxes  on  this  class 
of  business.  California — says  our  Insurance  Commissioner,  when 
speaking  of  the  taxation  of  these  companies  in  his  report  for  1904 — "has 
not  dealt  harshly  with  them." 

Arguments  by  insurance  companies  against  any  taxation. 

Insurance  agents  and  representatives  have  been  prolific  in  the  inven- 
tion of  arguments  against  any  sort  of  taxation  on  their  industry.  These 
arguments  have  been,  perhaps,  most  forcibly  summed  up  by  United 
States  Senator  Charles  Sumner,  who,  speaking  on  the  proposal  to  tax 
insurance  companies,  said: 

The  business  of  insurance,  as  it  seems  to  me,  is  peculiar.  It  differs  from  most  other 
business.  It  is  not  strictly,  if  I  may  so  say,  a  money-making  business,  but  it  is  a  money- 
saving  business.  I  know  that  persons  get  up  insurance  companies  in  order  to  advance 
their  own  interests,  but  the  primary  object  of  the  insurance  office  is  to  protect  other 
people,  and  particularly  the  poor;  it  is  to  help  the  poor.  I  say,  therefore,  it  is  not 
primarily,  as  compared  with  many  other  businesses,  a  money-making  business.  On 
that  account,  it  seems  to  me,  it  has  a  title  to  a  certain  consideration.  Now  what  is  pro- 
posed? A  tax  on  the  premiums.  What  are  the  premiums?  The  premiums  are  them- 
selves a  tax.  The  premiums  constitute  the  tax  which  the  person  insured  pays  for  his 
insurance;  and  now  it  is  proposed  to  put  a  tax  on  a  tax.  Thi3  is  the  precise  case.  I 
state  it  in  this  way  in  order  to  simplify  it;  in  order  to  reduce  it,  if  I  may  so  say,  to  its 
most  naked  form. 

Further  arguments  run  as  follows: 

In  one  of  the  decisions  of  the  Supreme  Court  of  Massachusetts  the 
statement  was  that  a  tax  on  the  business  of  mutual  life  insurance  is  in 
effect  a  tax  upon  prudence. 

The  question  is  asked  why  should  contributions,  in  the  shape  of  premiums,  to  a  life 
insurance  company  be  taxed,  and  the  contributions  to  an  orphan  asylum,  an  old  peo- 
ple's home,  or  other  charitable,  benevolent,  religious,  or  educational  institutions,  be 
exempt?  The  same  reasons  for  exemption  seem  to  apply  to  each,  and  the  work  from  a 
humanitarian  standpoint  is  the  same  or  seems  so. 

The  great  accumulations  of  life  insurance  companies  are,  strictly  speaking,  debts 
owed  to  the  policyholders,  and  this  is  a  fact  that  legislators,  in  making  insurance  taxa- 
tion laws,  overlook  entirely.  If  a  man  wishes  to  be  thrifty  and  provident  and  insures 
himself  against  his  death  and  his  family  against  the  possibility  of  becoming  a  burden 
on  the  State,  why  should  he  be  taxed  and  a  less  provident  man,  who  does  not  insure 
himself  and  possibly  allows  his  family  to  become  a  charge  to  the  State,  escape  the 
taxation?  The  provident  man  is  rendering  a  service  to  the  State  and  the  other  may  be 
making  a  burden  for  the  State,  and  yet  the  former  is  taxed  and  the  latter  is  not. 

17  — RT 


258  REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 

This  line  of  argument  rests  upon  a  number  of  false  assumptions. 
The  first  is  that  insurance,  whether  against  loss  by  fire  or  loss  by- 
death,  is  in  some  degree  a  philanthropic  enterprise,  or  a  charity.  The 
second  false  assumption  is  that  insurance  bought  and  owned  by  the 
policyholders  is  not  property  and  is  not  essentially  a  commodity  like 
any  other  that  is  bought  and  sold.  It  is  needless,  in  the  face  of  the 
recent  revelations  as  to  the  conduct  of  the  insurance  business,  both  life 
and  fire,  to  do  more  than  point  out  that  it  is  a  lucrative  business, 
engaged  in  for  money  making,  as  it  should  be.  The  payment  of  fire 
losses  or  of  life  insurance  is  not  almsgiving  in  any  sense  whatsoever; 
it  is  merely  the  settlement  of  a  contract  for  which  the  assured  has  paid 
a  fair  equivalent.  An  insurance  company  run  as  a  philanthropy 
usually  comes  to  grief.     . 

It  is  easily  possible  to  show,  in  precisely  the  same  manner  as  is  done 
above  for  the  insurance  business,  that  any  other  business  is  rendering  a 
service  to  the  State,  and  might  put  in  as  good  a  claim  for  exemption 
from  taxation.  If  a  man  raises  good  cattle,  makes  good  butter,  or 
manufactures  good  clothing,  or  for  that  matter  does  anything  well,  he 
benefits  the  whole  community  as  well  as  himself.  Banks  of  all  sorts 
encourage  thrift,  yet  they  do  not  generally  ask  to  be  exempt  from  taxa- 
tion for  this  ''philanthropic"  action. 

It  may  be  added  that  this  Commission  has  actually  had  presented  to 
it  this  same  line  of  argument,  in  favor  of  tax  exemption  or  tax  reduc- 
tion on  the  ground  of  "  public  service,"  by  representatives  of  many 
different  enterprises,  including:  a  breeder  of  fine  cattle,  one  banker,  a 
telephone  company,  several  wineries,  and  mining  companies. 

Insurance  is  a  commodity  bought  and  sold  very  much  like  other  com- 
modities. If  we  tax  the  business  of  selling  potatoes,  stoves,  whisky, 
transportation,  gas,  light,  heat  and  power,  and  hundreds  of  other  indus- 
tries, why  not  tax  the  business  of  selling  insurance? 

The  proper  method  of  taxation. 

As  in  the  nature  of  things  this  industry  can  not  be  taxed  by  the  gen- 
eral property  tax,  some  other  method  must  be  devised;  the  one  usually 
devised  is  a  tax  on  premiums. 

The  only  real  point  at  issue  is  to  determine  the  method  and  the  rate. 
If  a  gross  earnings  tax  is  appropriate  for  a  railroad,  it  is  equally  appro- 
priate for  an  insurance  company.  All  the  more  so,  in  the  latter  case, 
as  there  is  not  likely  to  be  any  property  within  the  jurisdiction  of  the 
State  to  tax. 

A  tax  on  gross  premiums  falls  on  the  company,  or  the  stockholders 
therein — not,  as  some  agents  and  company  advocates  would  have  us 
believe,  on  the  policyholder.  In  mutual  insurance  companies  the 
policyholder  occupies  at  the  same  time  the  place  of  stockholder  and  of 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  259 

policyholder.  In  such  cases  he  will  bear  his  share  of  the  tax,  as  he 
should,  for  he  gets  his  share  of  the  profits.  The  premiums  for  both  life 
and  fire  insurance  are  fixed  by  competition — or  when  combinations 
exist  are  fixed  by  agreement  at  the  point  of  highest  returns.  They  can 
not  be  arbitrarily  raised  in  order  to  shift  the  tax  to  the  policyholder. 
To  raise  them  would  mean  to  lose  business  and  to  lose  more  money 
than  the  taxes  would  amount  to.  But  even  if  the  tax  did  fall  on  the 
policyholder,  it  would  not  be  unjust.  If  a  man  saves  $10,000  and  invests 
it  in  a  house  and  lot,  he  is  taxed  thereon.  If,  instead,  he  invests  it  in 
life  insurance,  why  should  he  not  be  taxed  thereon? 

The  rate  of  a  tax  on  gross  premiums. 

The  business  of  insurance  is  so  peculiar  that  the  rules  developed  for 
the  determination  of  the  tax  rate  on  corporations  in  general  are  not 
easy  of  application.  But  inasmuch  as  it  is  the  consensus  of  opinion  in 
so  many  other  states  that  insurance  companies  ought  to  pay  2%  of  their 
gross  premiums  as  taxes,  that  is  presumably  a  safe  guide. 

But  the  chief  consideration  is  that  a  2%  rate  would  do  away  with  the 
greater  part  of  the  existing  discrimination.  It  would  not  be  an  increase 
on  all  companies,  but  only  on  those  of  certain  states  and  countries 
which,  as  explained  above,  do  not  pay  under  the  retaliatory  clause. 
Even  for  these  companies  it  would  not  be  a  doubling  of  taxes,  for  local 
licenses  would  be  remitted. 

The  rate  recommended. 

The  Commission,  therefore,  recommends  that  all  insurance  companies, 
fire  as  well  as  life,  foreign  and  domestic  alike,  shall  pay  2%  per  annum 
on  gross  premiums  without  deduction  for  losses.  This  tax  should  be  in 
lieu  of  all  other  taxes  and  licenses,  except  taxes  on  real  estate  held  in 
and  taxable  in  the  State.  It  also  recommends  the  continuance  of  the 
retaliatory  law,  not  only  for  the  protection  of  domestic  companies,  but 
because  it  is  believed  to  exercise  a  powerful  influence  in  the  direction  of 
bringing  about  uniformity  in  methods  of  taxation  by  the  different  states. 

The  Commission  believes  that  this  system  should  apply  to  companies 
organized  under  the  laws  of  California,  as  well  as  to  those  organized 
under  the  laws  of  other  states  and  countries.  In  the  first  place,  this 
does  away  with  all  discrimination  between  domestic  and  foreign  com- 
panies, which  is  but  fair,  and  moreover  gives  our  companies  a  better 
chance  to  do  business  in  other  states  under  the  retaliatory  and  recip- 
rocal laws.  But  the  greatest  advantage  to  the  domestic  companies 
would  arise  from  the  fact  that  they  would  then  be  free  to  make  their 
investments  as  they  saw  fit,  in  securities  issued  by  corporations  of  other 
states  as  well  as  in  California  securities.  The  present  tax  law,  which 
practically  prohibits  a  California  insurance  company  from  holding  any 


260  REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 

but  California  securities,  is  a  menace  to  the  safety  of  these  companies, 
and  lessens  the  ability  of  the  companies  to  protect  their  policyholders. 
The  argument  on  this  point  presented  in  the  preceding  chapter  in  favor 
of  giving  the  banks  greater  freedom  in  making  their  investments  applies 
with  even  greater  force  to  insurance  companies.  It  would  be  of 
advantage  to  policyholders  as  well  as  to  the  companies  by  increasing 
the  solvency  of  the  companies. 

When  we  consider  the  advantages  of  the  new  system  to  the  com- 
panies, in  freedom  from  the  danger,  annoyance,  and  expense  of  the  local 
licenses,  and  to  domestic  companies  in  the  greater  freedom  of  invest- 
ments, the  proposed  increase  in  the  tax  rate  is  insignificant. 

Taxation  of  insurance  companies  in  other  states. 

The  following  compilation  of  the  taxes  applying  to  insurance  com^ 
panies  in  other  states  is  based  upon  the  Insurance  Year  Book,  Life  and 
Miscellaneous,  and  a  compilation  of  Fire  Insurance  Laws,  Taxes  and 
Fees,  published  by  the  Spectator  Company.  Some  errors  discovered 
therein  have  been  corrected: 

Taxation  of  insurance  companies  in  other  states. 

Alabama.  $1  on  each  $100  of  gross  premiums.  Domestic  companies  taxed  on  their 
property  may  deduct  taxes  so  paid. 

Arizona.     2%  on  gross  premiums,  in  lieu  of  all  other  taxes. 

Arkansas.    2£%  on  net  receipts. 

Colorado.    2%  on  gross  premiums. 

Connecticut.     Domestic  mutual  fire  insurance  companies,  taxed  on  corporate  fran- 
chise, |  of  1%  on  balance  of  total  amount  of  assets  over  unpaid  losses,  etc.     Domestic 
mutual  life,  similar  corporate  franchise  tax  $  of  1%  on  total  amount  of  premiums,  less 
losses.     Companies  of  other  states,  retaliatory  fees  and  taxes;  of  foreign  countries,  :! 
on  gross  premiums. 

Delaware.  All  insurance  companies,  1|%  on  gross  premiums;  domestic  companies, 
$100  annually;  foreign  guaranty  and  casualty  companies,  1|%  on  gross  premiums;  all 
fire  insurance  companies,  j  of  1%  of  gross  premiums. 

District  of  Columbia.    l\%  on  premium  receipts. 

Florida.  Fire  companies,  1%  on  gross  premiums;  other  companies,  2%  on  gross 
premiums. 

Georgia.     1%  on  gross  premiums,  less  premiums  on  canceled  policies. 

Idaho.  All  except  mutual  companies,  2%  on  gross  premiums,  less  losses  paid  in  the 
State. 

Illinois.  Foreign,  other  than  life,  2%  on  gross  premiums;  mutual  companies,  2%  on 
cash  collected  as  premiums  from  policyholders  in  the  State;  in  lieu  of  all  other  taxes. 

Indiana.    $3  on  each  $100  of  premiums,  less  losses  paid  in  the  State. 

Iowa.  Foreign  companies  outside  of  the  United  States,  3£%  on  gross  premiums;  of 
other  states,  2i%  of  gross  premiums;  domestic  fire  companies,  1%  on  gross  premiums. 

Kentucky.  Foreign  companies,  2%  on  gross  premiums ;  fire  companies,  $2  on  each 
$100  of  premiums;  less  return  premiums  and  reinsurance. 

Louisiana.  Life  and  accident,  69  classes,  $20,000  to  $700,000,  rates  $150  to  $5,250. 
Fire,  marine,  etc.,  classes  $10,000  to  $300,000,  rates  $150  to  $4,500. 


REPORT   OF    COMMISSION    ON   REVENUE   AND    TAXATION.  261 

Maine.  Domestic,  2%  on  premiums,  less  dividends  paid  to  policyholders  in  the 
State:  all  other  companies,  1|%  on  net  premiums. 

Maryland.     1^%  on  gross  premiums. 

Massachusetts.  Life,  $  of  1%  on  the  net  value  of  all  policies  in  force;  other  domes- 
tic, 1     on  net  premiums;  other  foreign,  2%  on  net  premiums. 

Michigan.    2%  on  gross  premiums.     Foreign  fire  and  marine,  3%. 

Minnesota.    2%  on  gross  premiums. 

Mississippi.  Fire  companies,  $1,000.  Life,  doing  business  March  17,  1900,  $1,000; 
organized  later,  first  year  $250,  second  year  $500,  third  year  $750,  afterwards  $1,000- 
Accident  companies,  $250. 

Missoubi.     Domestic,  on  property  and  paid-up  capital ;  foreign,  2%  on  gross  premiums. 

Montana.    On  excess  of  premiums  over  losses  and  expenses  as  on  personal  property. 

Nebraska.  Foreign  companies,  2%  on  gross  premiums;  others,  at  property  rates  on 
net  premiums. 

Nevada.     License  tax  of  $100. 

New  Hampshire.  Foreign  fire  and  marine,  2;^  on  gross  premiums;  other  foreign,  1% 
on  gross  premiums. 

New  Jersey.     Fire,  2%  on  gross  premiums;  life,  ^050  of  1%  ;  others,  1%. 

New  York.  1%  on  gross  premiums,  but  marine  companies  of  foreign  countries  2%  on 
gross  premiums;  others,  of  foreign  countries  exempt,  as  are  also  fire  and  marine  com- 
panies of  other  states. 

New  Mexico.     At  property  rates  on  net  premiums. 

North  Carolina.  2£%  on  gross  receipts  in  the  State  ;  but  only  1%  if  there  are  invest- 
ments in  the  State  equal  to  one  fourth  of  the  entire  assets;  or  J  of  1%  if  investments  of 
three  fourths  of  assets. 

North  Dakota.     2i%  on  gross  premiums. 

Ohio.     2i%  on  gross  premiums. 

Oklahoma.     On  net  receipts  as  on  other  personal  property. 

Oregon.     Foreign,  2%  on  gross  receipts,  less  losses  paid  in  State. 

Pennsylvania.     Domestic,  8  mills  on  gross  premiums  ;  foreign,  2% -on  gross  premiums. 

Rhode  Island.     2%  on  gross  premiums. 

South  Carolina.     In  addition  to  license  fee  of  $100,  h  of  1%  on  gross  premiums. 

South  Dakota.     Domestic,  on  capital  stock;  foreign,  2i%  on  gross  premiums. 

Tennessee.  Foreign,  2£%  on  gross  premiums;  domestic  tire,  1|%  on  gross  premiums  ; 
domestic  mutual  tire,  doing  business  outside  of  county  of  domicile,  $300. 

Texas.     Life.  2%  on  gross  premiums;  fire,  1^%;  others,  1%. 

Utah.     H%  on  gross  premiums,  less  property  taxes. 

Vermont.  2%  on  gross  amount  of  premiums  and  assessments  collected,  less  return 
premiums,  dividends,  and  reinsurance  with  domestic  companies. 

Virginia.  2%  on  gross  premiums,  less  return  premiums,  dividends,  and  reinsurance 
with  authorized  domestic  companies. 

Washington.    2%  on  premiums,  less  losses  paid. 

We-t  Virginia.     H  mills  on  each  $1  of  risks  in  the  State. 

Wisconsin.  Domestic  life,  not  purely  assessment  companies,  license  fee  of  3%  on 
gross  premiums;  other  life,  $300;  marine  and  fire,  2%  on  gross  premiums. 

Wyoming.     24%  on  gross  premiums. 

Hawaii.    2%  on  net  income. 


262  REPORT   OP   COMMISSION   ON   REVENUE   AND   TAXATION. 


CHAPTER  VIII. 


TAXATION  OP  FRANCHISES. 

Nature  of  corporate  franchises. 

There  are  three  different  classes  of  franchises  belonging  to  corpora- 
tions recognized  by  the  revenue  laws  of  California  as  taxable. 

The  franchise  to  be. 

The  first  is  the  franchise  to  be  a  corporation,  a  privilege  accorded  to 
any  three  or  more  persons  who  associate  together  in  the  manner 
prescribed  for  the  formation  of  private  corporations.  This  franchise 
conveys  the  right  to  use  the  corporate  name,  to  have  a  corporate  seal, 
to  sue  and  to  be  sued,  and  in  general  to  enjoy  the  privileges  ordinarily 
permitted  to  corporations.  The  first  tax  imposed  on  this  franchise  is 
the  charge  imposed  at  the  time  of  granting  the  articles  of  incorporation, 
and  is  a  fee  which  varies  with  the  amount  of  the  capital  proposed  for 
the  company.  The  fees  imposed  in  California  for  granting  this  kind  of 
a  franchise  by  the  State  are  paid  to  the  Secretary  of  State  at  the  time 
the  articles  of  incorporation  are  filed.     They  are  as  follows: 

Fees  for  Filing  Articles  of  Incorporation. 

Under  $25,000 $15  00 

$25,000  to  $75,000 25  00 

$75,000  to  $200,000 50  00 

$200,000  to  $500,000 ..._..  75  00 

$500,000  to  $1,000,000 100  00 

For  every  $500,000,  or  fraction  thereof,  of  capital  stock  over  and 
above  $1,000,000 $50  additional 

Other  states  charge  similar  fees  for  incorporation. 

The  principal  fees  charged  in  other  states  are  as  follows: 

Alabama.  When  proposed  capital  stock  does  not  exceed  $50,000,  $25;  $fc0,000  to 
$100,000,  $50;  $100,000  to  $250,000,  $75;  $250,000  to  $500,000,  $100;  $500,000  to  $1,000,000, 
$200;  $1,000,000  and  over,  $250. 

Arizona.  For  filing  articles  of  incorporation,  $5;  affidavit  of  publication,  $3;  for 
recording  articles,  20  cents  per  folio. 

Arkansas.     Flat  fee  of  $25.     Special  rates  for  railroads. 

Colorado.  $20,  if  the  stock  does  not  exceed  $50,000,  and  20  cents  on  each  additional 
$1,000. 

Connecticut.  50  cents  on  every  $1,000  of  authorized  capital  stock  up  to  $5,000,000,  and 
10  cents  for  every  $1,000  in  excess  of  $5,000,000,  for  all  corporations  organized  under 
general  laws.  Corporations  organized  under  special  laws  pay  $100  for  their  authority 
and  a  tax  of  $1  on  each  $1,000  of  capital  stock,  but  in  no  case  less  than  $50. 

Delaware.  When  the  capital  stock  does  not  exceed  $50,000,  $20,  and  for  each  addi- 
tional sura  20  cents  per  $1,000. 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  263 

Florida.     A  Hat  fee  of  $100. 

Idaho.  When  capital  stock  does  not  exceed  $25,000,  $5;  $25,000  to  $100,000,  $10; 
$100,000  to  $500,000,  $20;  over  $500,000,  $25. 

Illinois.  Capital  not  over  $2,500,  $30;  $2,500  to  $5,000,  $50;  over  $5,000,  $1  for  each 
additional  $1,000. 

Indiana.    ^  of  1%,  with  a  minimum  of  $10. 

Iowa.     A  uniform  fee  of  $25,  plus  $1  on  each  $1,000  over  $10,000;  no  fee  to  exceed  $350. 

Kansas.  Corporations  pay  a  charter  fee  to  the  State  Treasurer  for  the  benefit  of  the 
State  school  fund;  rates,  fa  of  1%  on  the  first  $100,000  of  capital  stock,  fa  of  1%  on  the 
next  $400,000,  $200  for  each  $1,000,000  or  fraction  thereof  over  $500,000;  also  fees  for  filing 
papers,  etc. 

Kentucky.     fa  of  1%. 

Louisiana.    No  fees. 

Maine.     A  complicated  system  of  fees  for  various  officers. 

Maryland.  |  of  1%,  to  be  paid  annually  after  two  years  until  the  corporation  begins 
business. 

Massachusetts.     ^  of  1%.     Minimum,  $5;  maximum,  $200. 

Michigan.     £  of  1  mill,  with  a  minimum  of  $5. 

Minnesota.     First  $50,000  of  capital  stock,  $50;  every  additional  $10,000,  $5. 

Mississippi.  Capital  stock  not  exceeding  $10,000,  $20;  $10,000  to  $30,000,  $40;  $30,000 
to  $50,000,  $60;  $50,000  and  over,  fa  of  1%.     Minimum,  $5;  maximum,  $250. 

Missouri.     On  first  $50,000  or  less,  $50;  every  additional  $10,000,  $5. 

Montana.  50  cents  on  each  $1,000  of  capital  stock  up  to  $1,000,000 ;  over  $1,000,000, 
25  cents  on  each  $1,000.     Maximum,  $1,000. 

Nebraska.  $10,  and  if  the  authorized  capital  stock  exceeds  $1,000,000,  10  cents  for 
each  $1,000  in  excess  of  $1,000,000. 

Nevada.     15  cents  for  each  $1,000.     Minimum,  $15. 

New  Hampshire.     All  special  by  classes  of  corporations. 

New  Jersey.  Incorporation  fee,  20  cents  for  each  $1,000  of  capital  stock  authorized; 
$25  minimum  tax.  Increase  of  stock,  20  cents  for  each  $1,000;  $20  minimum  tax.  Con- 
solidation and  merger  of  corporations,  20  cents  for  each  $1,000  authorized  beyond  capital 
of  corporations  consolidated  ;  $20  minimum  tax.  Extension  of  corporate  existence, 
same  as  organization.  Dissolution,  change  of  name,  decrease  of  capital  stock,  etc.,  $25. 
Foreign  corporations,  privilege  tax,  $10      Foreign  insurance  companies,  $20. 

New  Mexico.     Various  fees  for  different  classes  of  corporations. 

New  York.  Every  stock  company  when  incorporated  pays  a  so-called  organization 
tax  of  fa  of  1%  of  authorized  capital  stock,  collected  by  State  Treasurer.  The  same 
rate  applies  to  every  increase.  Every  foreign  company  entering  the  State  pays  a  "license 
fee"  of  |  of  1%  of  capital  stock  employed  by  it  in  the  State  during  the  first  year  of  busi- 
ness and  upon  any  increase  in  subsequent  years. 

North  Carolina.  Certificate  of  incorporation,  20  cents  per  $1,000  stock  authorized, 
minimum  $25.  Increase  of  capital,  20  cents  per  $1,000,  minimum  $20;  increase  of 
capital,  $20. 

North  Dakota.  $50  for  the  first  $50,000  or  fraction  ;  $5  for  each  additional  $10,000  or 
fraction. 

Ohio.  Fees  for  filing  the  articles  of  incorporation,  stock  under  $10,000,  $10;  over 
$10,000,  fa  of  1%  ;  same  for  increase. 

Oklahoma.    $5. 

Oregon.  Where  the  capital  stock  shall  not  exceed  $5,000,  $10;  $5,000  to  $10,000,  $15; 
$10,000  to  $25,000,  $20;  $25,000  to  $50,000,  $25;  $50,000  to  $100,000,  $35;  $100,000  to  $250,000, 
$45;  $250,000  to  $500,000,  $60;  $500,000  to  $1,000,000,  $75;  $1,000,000  to  $2,000,000,  $90; 
over  $2,000,000,  $100. 


264  REPORT   OP    COMMISSION    ON   REVENUE   AND    TAXATION. 

Pennsylvania.     ^  of  1%. 

Rhode  Island.  Incorporation  fees,  certificate,  general  law  $1,  special  act  $100;  also 
fa  of  1%  on  capital  stock  above  $100,000.  Increase  of  capital  stock,  fa  of  1%;  civil  com- 
mission, $2. 

South  Carolina.  Charter  issued  or  renewed,  1  mill  on  each  dollar  of  capital  stock 
up  to  $100,000;  h  mill  on  each  dollar  of  capital  stock  from  $100,000  to  $1,000,000;  i  mill  on 
each  dollar  of  capital  stock  over  $1,000,000. 

South  Dakota.     Flat  fee  of  $10. 

Tennessee,     fa  of  1%. 

Texas.     Different  rates  for  different  classes  of  corporations. 

Utah.     25  cents  for  each  $1,000. 

Vermont.     Complicated  system. 

Virginia.  Fora  company  chartered  by  special  act  whose  maximum  authorized  stock 
is  not  over  $5,000,  $25;  $5,000  to  $10,000,  $50;  $10,000  to  $25,000,  $75;  $25,000  to  $50,000, 
$125:  $50,000  to  $100,000,  $200;  $100,000  to  $300,000,  $325;  $300,000  to  $500,000,  $450;  $500,000 
to  $800, 000,  $575 ;  $800,000  to  $1,000,000,  $750;  $1,000,000  to  $10,000,000,  $1,000;  $10,000,000 
to  $20,000,000,  $1,250;  $20,000,000  to  $30,000,000,  $1,500;  $30,000,000  to  $40,000,000,  $1,750; 
$40,000,000  to  $50,000,000,  $2,000;  $50,000,000  to  $60,000,000,  $2,250;  $60,000,000  to  $70,000,000, 
$2,500:  $70,000,000  to  $80,000,000,  $2,750;  $80,000,000  to  $90,000,000,  $3,000 ;  over  $90,000,000, 

$:..ooo. 

For  a  corporation  chartered  under  the  general  laws  the  fees  are  as  follows:  $5,000  or 
under,  $15;  $5,000  to  $10,000,  $30;  $10,000  to  $25,000,  $45;  $25,000  to  $50,000,  $75;  $50,000  to 
$100,000,  $120;  $100,000  to  $300,000,  $195;  $300,000  to  $500,000,  $270 ;  $500,000  to  $800,000,  $345; 
$800,000  to  $1,000,000,  $450;  $1,000,000  and  over,  $600.  Same  provisions  as  in  preceding 
section  for  a  fee  upon  increase  of  capital  stock. 

Washington.     Flat  fee  of  $10. 

West  Virginia.     Flat  fee  of  $4. 

Wisconsin.     Small  fees,  varying  with  different  classes  of  corporations. 

Wyoming.  Incorporation  fees,  capital  $5,000  or  less,  $5;  $5,000  to  $100,000,  $10;  over 
$100,000,  5  cents  additional  for  each  $1,000  excess.  These  fees  are  in  full  of  all  charges 
for  filing  and  recording  articles  of  incorporation.  Foreign  corporations,  filing  copies  of 
charters,  $1. 

Taxation  of  the  franchise  "to  do." 

The  second  sort  of  a  taxable  franchise  recognized  by  the  laws  of 
California  corresponds  approximately  to  what  is  sometimes  called  the 
franchise  "to  do  or  to  act."  That  is,  not  merely  the  privilege  of 
becoming  a  corporation,  but  the  general  privilege  of  carrying  on 
business  and  of  continuing  to  be  a  corporation.  This  kind  of  a 
franchise  is,  since  1905,  subject  to  an  annual  charge  or  fee  paid  to  the 
State,  which  was  imposed  for  the  first  time  by  the  Legislature  of  1905 
and  amended  again  by  the  Special  Session  of  the  Legislature  in  1906. 
The  fee  was  originally  $10  from  every  corporation,  domestic  and 
foreign,  doing  business  in  California,  and  was  raised  in  1906  to  $20, 
covering  the  same  class  of  corporations  and  imposed  in  the  same 
manner. 

While  this  fee  as  it  now  stands  on  the  statute  books  seems  to  be  a 
charge  primarily  for  revenue  purposes,  it  was  undoubtedly  originally 
conceived  as  a  fee  for  a  special  service;  namely,  for  the  service  of 
keeping  a  continuous  record  of  existing  corporations  and  of  weeding 


REPORT    OF    COMMISSION    ON    REVENUE   AND   TAXATION.  265 

out  and  wiping  off  the  records  of  the  State  all  corporations  which  were 
not  continuing  in  business.  It  was  for  this  purpose  and  in  this  sense 
that  it  was  first  suggested  by  the  representative  of  the  United  States 
Bureau  of  Corporations,  following  whose  suggestion  it  was  adopted. 
In  the  framing  of  the  law  this  purpose  seems  to  have  been  partially 
lost  sight  of,  inasmuch  as  no  provision  was  made  calling  for  a  report  as 
to  the  standing  of  the  company,  its  business,  outstanding  capital, 
bonded  indebtedness,  and  the  like,  which  is  usually  connected  with 
the  imposition  of  similar  charges  in  other  states.  Such  annual 
franchise  fees  are  found  in  some  other  states,  but  not  many. 

Annual  franchise  tax  in  other  states. 

Comparatively  few  of  the  states  have  a  distinct  annual  franchise  tax 
on  corporations  at  all  analogous  to  the  one  introduced  by  our  last  Leg- 
islature. In  many  of  the  states  they  have  a  general  system  of  corpora- 
tion taxes.  However,  the  same  result  is  attained  in  other  ways.  In 
the  Southern  States,  which  have  a  general  license  system,  corporations 
are  brought  more  or  less  under  that  plan  of  taxation.  In  the  following 
list  we  have  omitted  franchise  taxes  based  on  gross  earnings,  taxes  levied 
on  special  franchises  as  property  and  taxes  levied  on  the  "corporate 
excess,"  but  have  included  certain  license  taxes  when  levied  directly 
upon  the  capital  stock.  In  general,  the  most  approved  rate  seems  to 
be  yjj-  of  1%.  In  almost  all  cases  where  the  attempt  has  been  made  to 
classify,  the  rate  is  like  ours,  it  is  regressive,  that  is,  a  smaller  percent- 
age for  large  capital  than  for  small  capital. 

The  following  list  includes  all  that  can  be  gleaned  on  that  subject: 

Alabama.  All  corporations  domestic  and  foreign  not  specifically  required  to  pay  a 
license  tax.  Under  $10,000,  $10;  $10,000  to  $25,000,  $15;  $25,000  to  $50,000,  $25;  $50,000  to 
$100,000,  $50;  $100,000  to  $200,000,  $75;  $200,000  to  $300,000,  $125;  $300,000  to  $400,000,  $175; 
$4i  w i.OOO  to  $500,000,  $200 ;  $500,000  to  $1,000,000,  $300 ;  over  $1,000,000,  $500.  This  is  virtu- 
ally a  part  of  the  general  license  tax  system. 

Colorado.  Called  a  license  tax.  Domestic  corporations  with  capital  of  $25,000  or 
over,  2  cents  on  each  $1,000;  foreign,  4  cents  per  $1,000,  unless  par  value  of  shares  is  less 
than  $1,  then  2i  cents  per  1,000  shares. 

Connecticut.     Interwoven  with  general  scheme. 

Georgia.    Part  of  the  license  tax  system,  according  to  kind  of  business. 

Illinois.    Special  method  of  taxing  "corporate  excess." 

Louisiana.     Part  of  the  general  license  tax  system  and  according  to  kind  of  business. 

Maine.  Every  corporation  incorporated  under  the  laws  of  this  State,  except  such  as 
are  excepted  by  (the  following  section),  shall  pay  an  annual  franchise  tax  of  $5,  pro- 
vided the  authorized  capital  of  said  corporation  does  not  exceed  $50,000;  of  $10,  provided 
said  authorized  capital  stock  exceeds  $50,000  and  does  not  exceed  $200,000;  of  $25,  $200,000 
to$500,00<i;  $50,  $500,000  to  $1 ,000.000 ;  $25  per  annum  per  $1,000,000,  or  any  part  thereof, 
n  excess  of  $1,000,000. 

Massachusetts.     Interwoven  in  general  system. 
Mississippi.     Part  of  license  system. 

New  Jersey.  All  corporations  incorporated  under  the  laws  of  this  State,  other  than 
those  which  arc  subject  to  the  payment  of  a  State  franchise  tax  assessed  upon  the  hasi- 


266  REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 

of  gross  receipts,  shall  pay  an  annual  license  fee  or  franchise  tax  of  ^  of  1%  on  all 
amounts  of  capital  stock  issued  and  outstanding  up  to  and  including  the  sum  of  $3,000,000, 
an  annual  license  fee  or  franchise  tax  of  ^  of  1%,  and  the  further  sum  of  $50  per  annum 
per  $1,000,000,  or  any  part  thereof,  on  all  amounts  of  capital  stock  issued  and  outstanding 
in  excess  of  $5,000,000;  provided,  that  this  act  shall  not  apply  to  railway,  canal,  or 
banking  corporations,  or  purely  charitable  or  purely  educational  associations  not  con- 
ducted for  profit,  or  manufacturing  or  mining  corporations  at  least  50%  of  whose  capital 
stock  issued  and  outstanding  is  invested  in  mining  or  manufacturing  carried  on  within 
this  State,  and  which  mining  or  manufacturing  corporations  shall  have  stated  in  the 
annual  return  to  the  State  Board  of  Assessors  where  the  mine  or  manufacturing  estab- 
lishment of  such  corporation  or  corporations  is  or  are  located,  the  character  of  the  ores 
mined  or  the  goods  manufactured,  the  total  amount  of  its  capital  stock  embarked  in  the 
business  of  mining  or  manufacturing  and  the  amount  of  capital  stock  actually  employed 
in  New  Jersey  in  carrying  on  such  mining  or  manufacturing  business ;  if  any  manu- 
facturing or  mining  company  carrying  on  business  in  this  State  shall  have  less  than  50% 
of  its  capital  stock,  issued  and  outstanding,  invested  in  business  carried  on  within  this 
State,  such  company  shall  pay  the  annual  license  fee  or  franchise  tax  herein  provided  for 
companies  not  carrying  on  business  in  this  State,  but  shall  be  entitled,  in  the  computa- 
tion of  such  tax,  to  a  deduction  from  the  amount  of  its  capital  stock  issued  and  out- 
standing of  the  assessed  value  of  its  real  and  personal  estate  so  used  in  manufacturing 
or  mining. 

New  York.  The  rate  is  1|  mills  plus  i  of  a  mill  for  each  1%  of  dividends  in  excess 
of  6%.  The  base  is  capital  stock  at  par  except  when  no  dividends  have  been  declared, 
then  market  value.  The  basis  rate  equals  15  cents  per  $100  in  our  form  of  expressing 
rates.     This  is  really  part  of  a  general  scheme. 

North  Carolina.  On  each  and  every  corporation  organized  under  the  laws  of  this 
State  or  doing  business  in  this  State  (railroads,  banks,  building  and  loan  associations, 
insurance  companies,  telegraph  companies,  express  companies,  and  telephone  com- 
panies excepted)  an  annual  franchise  tax  in  proportion  to  the  amount  of  its  capital 
stock,  according  to  the  following  scale,  to  wit:  On  corporations  having  a  capital  stock 
paid  in  or  subscribed  of  $25,000  or  less,  $5;  over  $25,000  and  not  exceeding  $50,000, 
$10;  over  $50,000  and  not  exceeding  $100,000,  $25;  over  $100,000  and  not  exceeding  $250,000, 
$50;  over  $250,000  and  not  exceeding  $500,000,  $100;  over  $500,000  and  not  exceeding 
$1,000,000,  $200;  over  $1,000,000,  $500. 

Ohio.  The  rate  is  fg  of  1%,  minimum  $10.  The  base  is  subscribed,  issued,  and  out- 
standing capital  stock.  This  rate  equals  10  cents  per  $100.  It  is  mixed  in  with  the 
general  treatment. 

Oregon.  Capital  up  to  $5,000,  $10;  $5,000  to  $10,000,  $15:  $10,000  to  $25,000,  $20;  $25,000 
to  $50,000,  $30;  $50,000  to  $100,000,  $50;  $100,000  to  $250,000,  $70;  $250,000  to  $500,000,  $100; 
$500,000  to  $1,000,000,  $125;  $1,000,000  to  $2,000,000,  $175;  over  $2,000,000,  $200. 

Pennsylvania.     Involved  in  general  scheme. 

Texas.  All  domestic,  $10  minimum;  over  $50,000  and  under  $100,000,  $20;  over  $100,- 
000  and  under  $200,000,  $30;  over  $200,000,  $50.  Foreign,  $25,000  or  less,  $25;  over  $25,000 
and  under  $100,000,  $100;  over  $100,000  and  under  $1,000,000,  $100,  plus  $1  for  each 
$10,000;  over  $1,000,000,  an  additional  tax  of  $1  per  $10,000  on  the  excess  over  $1,000,000. 

Virginia.    A  license  tax. 

West  Virginia.  License  tax,  domestic  corporations,  not  more  than  $10,000,  $10;  over 
$10,000  and  not  over  $25,000,  $15;  over  $25,000  and  not  over  $50,000,  $20;  over  $50,000  and 
not  over  $100,000,  $25;  over  $100,000  and  not  over  $1,000,000,  $25,  plus  5  cents  for  every 
$1,000  in  excess  of  $100,000;  over  $1,000,000,  $70,  plus  $10  for  each  $100,000  or  fraction 
thereof  in  excess  of  $1,000,000.     Foreign  corporations,  higher. 

Taxation  of  special  and  general  franchises. 

Third,  the  revenue  laws,  as  interpreted  by  the  courts,  seem  to  recog- 
nize two  other  kinds  of  franchises,  which  we  may  call,  for  convenience, 
special  and  general,  but  they  are  so  closely  analogous  as  to  be  exceed- 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  267 

ingly  difficult  to  distinguish  one  from  another.  These  are  both  subject 
to  taxation  as  property  and  are  included  in  the  assessment  of  the  prop- 
erty of  the  corporations.  One  of  these  franchises  requires  a  special 
grant,  the  other  is  acquired  automatically  under  the  enjoyment  of  the 
powers  conferred  by  the  general  law  for  incorporation,  and  is,  as  will  be 
explained  below,  very  closely  akin  to  ''good  will."  These  two  classes 
of  franchises  are  here  grouped  together  and  treated  as  one  class,  simply 
because  they  are  to  be  valued  for  purposes  of  taxation  in  practically 
the  same  manner. 

The  first  to  be  recognized  in  California  as  franchises,  taxable  as  prop- 
erty, were  the  special  franchises  enjoyed  by  public-service  corporations, 
such  as  water  companies,  gas  companies,  street  railway  companies  and 
the  like,  which  use  the  public  streets,  under  some  special  permission  or 
enjoy  some  special  privileges  not  ordinarily  granted  to  citizens  generally. 
This  sort  of  a  special  franchise  has  been  taxable  in  California  for  a  long 
time.  They  were  taxable  under  the  old  Constitution  and  the  new  Con- 
stitution singles  them  out  as  special  subjects  for  taxation.  It  is  not 
necessary  to  review  the  large  number  of  cases  decided  by  the  Supreme 
Court  of  the  State  dealing  with  the  taxation  of  this  class  of  franchises, 
because  there  is  no  dispute  as  to  the  fact  that  they  are  property  and 
are  taxable  as  such.  The  United  States  Supreme  Court,  as  well  as  the 
California  Supreme  Court,  has  uniformly  sustained  the  taxation  of  this 
class  of  property. 

Every  corporation  has  a  franchise  taxable  as  property. 

From  this  practice  of  assessing  special  franchises  there  has  grown  up 
and  been  sanctioned  by  the  courts  a  practice  of  assuming  that  every 
corporation,  whether  a  public-service  corporation  or  not,  has  some  sort 
of  a  franchise  which  is  taxable  as  property  in  the  same  manner  as 
those  mentioned  above.  This  places  absolutely  unlimited  power  in  the 
hands  of  every  assessor  in  the  State  to  tax  corporations  in  his  district 
as  much  or  as  little  as  he  pleases,  utterly  irrespective  of  what  they 
ought  to  pay  or  can  afford  to  pay. 

Special  franchises  in  other  states. 

Special  franchises  are  taxed  in  most  other  states  in  one  way  or  another. 
In  states  where  the  corporations  are  covered  by  general  or  special  cor- 
poration taxes,  those  taxes  are  so  designed  as  to  include  the  value  of 
the  special  franchises.  When  the  corporations  are  covered  by  the  gen- 
eral property  tax,  the  value  of  these  franchises  is  included  either  as  a 
special  item  in  the  assessment  or  in  some  other  manner.  In  New  York, 
such  special  franchises  are  defined  solely  as  the  right  to  use  the  public 
streets,  to  go  beneath  them  or  to  go  above  them.  They  are  valued  by 
the  State  tax  commissioners,  but  subject  to  local  taxation  in  the  town 
where  they  are  located.     In  some  other  states  they  are  covered  by  an 


268  REPORT   OF   COMMISSION   ON  REVENUE   AND   TAXATION. 

assessment  levied  on  what  is  known  as  the  "corporate  excess."  This  is 
the  case  in  Illinois.  The  "corporate  excess"  may  be  denned  generally 
as  the  amount  by  which  the  value  of  the  outstanding  securities,  as  indi- 
cated by  their  market  value  or  by  their  annual  earnings,  dividends  and 
surplus,  exceeds  the  value  of  such  tangible  and  visible  property  as  can 
be  found. 

The  method  of  taxing-  special  franchises  in  California. 

The  general  method  approved  by  the  courts  of  California,  and  orig- 
inallv  prescribed  bv  the  Code,  for  the  determination  of  the  value  of 
these  special  franchises,  rests  upon  the  same  ideas  as  that  underlying 
the  determination  of  the  "corporate  excess"  described  in  another  chap- 
ter. To  determine  the  value  of  these  franchises  the  assessor  is  supposed 
to  ascertain  the  total  value  of  all  the  outstanding  securities,  and  to 
deduct  from  that  the  value  of  any  visible  or  tangible  property  which  he 
may  find  in  the  possession  of  the  corporation  and  the  difference  is  then 
assessed  as  the  value  of  the  franchise. 

As  is  explained  at  more  length  in  the  chapter  relating  to  the  taxa- 
tion of  banks,  the  Supreme  Court  of  California  has  held  that  the  same 
method  may  legally  be  used  for  the  determination  of  the  value  of  the 
franchise  possessed  by  any  corporation,  whether  a  public-service  corpo- 
ration or  not. 

The  taxation  of  corporate  franchises  in  general. 

As  our  law  goes  on  to  provide  that  the  franchise  of  any  corporation 
shall  be  assessed  at  the  place  where  the  head  office  is  located,  it  appears 
that  the  Code,  at  least,  contemplated  the  assessment  of  the  franchise 
as  property  against  every  kind  of  corporation.  It  may  well  be  that 
the  Constitution  makers  had  no  such  intention  when  they  defined  fran- 
chises as  among  those  articles  of  property  which  should  be  taxable,  for 
in  the  course  of  discussion  in  the  Constitutional  Convention,  the  ques- 
tion was  directly  asked,  whether  the  franchises  of  mining  corporations 
would  be  taxable  at  the  place  of  the  head  office,  or  in  the  place  where 
the  mine  was  located,  and  the  advocates  of  this  part  of  the  Constitution 
replied  emphatically  that  a  mining  corporation  had  no  franchise  of  any 
value  separable  from  its  tangible  property.  Nevertheless,  the  practice 
of  assessing  even  mining  companies  for  their  franchises  at  the  place 
where  the  head  office  is  located,  whether  that  be  where  the  mine  is 
located  or  not,  has  grown  up  out  of  the  provisions  of  the  Code,  and  such 
a  practice  is  fully  sustained  by  the  courts.  As  the  courts  stubbornly 
refuse  to  review  the  decision  of  an  assessor  as  to  values,  which  is  a 
matter  fully  within  his  discretionary  powers,  there  is  absolutely  no 
limit  to  the  assessor's  power  in  such  cases.  In  a  more  recent  decision 
the  courts  have  held  that  all  special  franchises,  such  as  the  right  to  use 
the  public  streets,  must  be  taxed  where  the  franchise  is  located  or  where 


REPORT   OP    COMMISSION   ON   REVENUE   AND   TAXATION.  269 

it  was  granted,  and  that  this  class  of  franchises  is  not  included  under  the 
general  franchise,  which  is  to  be  taxed  at  the  place  where  the  head 
office  is  located. 

Difference  between  these  two  franchises. 

While  these  two  classes  of  franchises,  which  for  convenience  we  have 
called  the  special  and  the  general,  are  apparently,  in  the  opinion  of  the 
Supreme  Court,  almost  precisely  alike  and  are  to  be  treated  in  the  same 
manner  for  the  purposes  of  taxation,  they  are,  from  the  economic  point 
of  view,  fundamentally  different. 

The  franchise  of  a  bank,  in  this  sense,  is  closely  analogous  to  that 
kind  of  property  known  as  "  good  will."  This  is  a  class  of  property 
which  presumably  might  be  taxed  under  the  provisions  of  our  revenue 
law,  but  which  as  a  rule  is  never  taxed  except  in  those  cases  in  which 
it  is  enjoyed  by  corporations  and  then  it  is  taxed  as  a  franchise.  It  is 
a  question,  open  for  serious  consideration,  whether  the  taxation  of  such 
a  franchise,  tantamount  to  the  taxation  of  the  good  will,  against  cor- 
porations, while  similar  items  of  property,  if  this  be  property,  are  not 
assessed  against  individuals  and  firms,  does  not  constitute  an  unjust 
discrimination  against  corporations. 

The  taxation  of  franchises  a  serious  question. 

The  taxation  of  franchises  of  this  class  is  a  much  vexed  question  in 
California   at  the  present  time.     Corporations  generally  protest  loudly 
that  it  forms  an  unjust  discrimination  against  them,  and  the  assessors 
are,  for  the  most  part,  doggedly  determined  to  put  such  property  on 
the  assessment  rolls    in  accordance  with  that  strict  interpretation  of 
the  law  and  the  Constitution  which   has  been  made  by  the  Supreme 
Court.     The  friction  at  this  point  is  intense  and  the  feud  between  the 
corporations  and  the  assessors  over  it  is  growing  more  bitter  every  year. 
The  assessors  see,  or  think  they  see,  in  it,  a  means  of  making  the  corpo- 
rations contribute  what  the  assessors  hold  to  be  the  corporations'  due 
share  of  the  taxes,  while  the    corporations  see  in  the  exercise  of  this 
power  on  the  part  of  the  assessor  the  possession  of  an  entirely  arbitrary 
power  not  subject  to  any  restraint  or  control.     "If,"  said  a  prominent 
corporation  attorney,  "the  assessor  may  value  the  franchise  of  the  Bank 
of  California  at  $750,000  and  of  the  Fireman's  Fund  Insurance  Com- 
pany at  $50,000,  and  if  the  courts  refuse  to  review,  as  they  have  done, 
the  assessor's  exercise  of  his  discretionary  powers  in  this  respect,  what 
is  to  hinder  him  from  making  these  assessments  four  or  five  millions 
respectively?"     The  right  of  the  corporation  aggrieved  to  appeal  to  the 
Supervisors  sitting  as  County  Board  of  Equalization  does  not  seem  to 
the  corporations  to  furnish  them  sufficient  protection  against  an  arbi- 
trary exercise  of  this  power.     As  a  matter  of  fact,  there  is  no  limit  in 
the  power  of  the  assessor  to  tax  corporations. 


270  REPORT   OP   COMMISSION   ON   REVENUE   AND   TAXATION. 

The  condition  unsatisfactory. 

The  whole  matter  of  the  taxation  of  franchises  is  in  an  extremely 
unsatisfactory  condition.  Any  solution  of  the  problem  will  be  extremely 
welcome  to  both  sides  of  the  controversy.  There  is  no  doubt  whatever 
that  there  is  an  element  in  the  value  of  corporate  property  which  is 
over  and  above  the  value  of  the  tangible  and  physical  property.  It  is 
a  value  which  attaches  to  all  the  property  of  the  corporations  because 
of  its  income  or  earning  power.  If,  however,  the  corporations  were 
taxed  upon  the  basis  of  their  earnings,  or  upon  any  equitable  basis  which 
referred  to  their  earnings,  the  vexed  question  would  disappear.  It  does 
not  exist  in  Europe,  because  corporations  there,  like  individuals,  are 
taxed  upon  the  basis  of  earnings. 

Popular  demand  for  the  taxation  of  franchises. 

There  is  undoubtedly  a  strong  demand  in  this  country,  which  has 
found  expression  in  California,  for  the  taxation  of  franchises.  The 
causes  for  this  demand  have  been  enumerated  by  Mr.  Judson  in  his 
work  of  Taxation  in  Missouri,  as  follows :  ' '  This  springs,  not  only  from 
the  sense  of  justice  which  requires  that  the  public  burdens  should  be 
shared  by  all  in  proportion  to  their  ability,  and  that  all  of  the  wealth 
protected  by  the  State  should  assist  in  the  support  of  the  State,  but  it  is 
doubtless  intensified  by  the  popular  discontent  with  the  confessed  failure 
of  our  present  taxing  system  to  reach  the  wealth  invested  in  public  and 
private  securities. 

"Another  cause  has  doubtless  operated  to  intensify  the  popular 
demand  for  the  taxation  of  the  franchise,  and  that  is  the  public  realiza- 
tion of  the  recklessness  and  jobbery  which  has  attended  the  granting  of 
franchises  for  the  use  -of  streets  in  our  municipalities.  Although  the 
city  charter  of  St.  Louis,  as  well  as  the  statutory  charters  for  the 
different  classes  of  cities,  authorize  the  application  of  the  rule  of  public 
competition  in  the  granting  of  franchises,  this  authorization  has  been  all 
but  universally  ignored,  and  private  favor  instead  of  public  competition 
has  been  the  rule.  The  result  is  that  our  cities  find  themselves,  in  their 
financial  straits,  deprived  of  the  means  of  revenue  which  they  might 
have  secured  by  exacting  conditions  for  the  granting  of  these  franchises 
when  they  were  in  eager  demand.  "While  cities  have  the  right  to  impose 
conditions  in  the  granting  of  such  franchises  for  the  use  of  their  streets, 
when  once  granted  and  vested  rights  are  Based  thereon,  such  vested 
rights  can  not  be  divested  without  compensation.  Such  vested  rights 
are  subject,  however,  as  other  property,  to  the  taxing  power  of  the 
State." 

Taxation  can  not  be  used  to  indemnify  cities  for  past  mistakes. 

He  might  have  added  another  cause  which  intensifies  the  demand 
for  the  taxation  of  franchises;  namely,  the  feeling  that  the  granting 


REPORT    OF    COMMISSION    ON    REVENUE    AND    TAXATION.  271 

of  the  franchises  makes  private  property  out  of  what,  in  the  nature  of 
things,  is  public  property,  and  that  while,  for  the  convenience  of  the 
operation  of  public  utilities,  it  may  be  best  to  leave  them  in  private 
hands,  yet  private  corporations  are  in  such  instances  using  public 
property.  This  feeling,  which  undoubtedly  underlies  the  strong  demand 
for  the  separate  taxation  of  franchises,  rests  upon  a  serious  confusion  of 
thought.  There  is  a  decided  distinction  between  a  charge  made  by  a 
municipality  for  the  use  of  its  streets  by  a  public-service  corporation 
and  a  tax  proper.  The  one  is  rent  for  the  use  of  public  property,  the 
other  is  an  assessed  contribution  for  the  support  of  government  and  the 
furtherance  of  the  general  aims  of  society.  If,  through  improvidence 
or  the  corrupt  granting  of  municipal  franchises  the  municipality  has 
temporarily  alienated  its  birthright,  it  can  not  rightfully  expect  to 
undertake  to  make  good  again  by  excessive  taxation. 

Mr.  Judson  expresses  this  idea  as  follows:  "But  when  we  fail  to 
avail  ourselves  of  such  opportunities,  and  public  opinion  permits  our 
streets  to  be  occupied  by  poles,  rails,  pipes  and  conduits,  for  the  asking, 
under  railroad,  gas,  electric,  water,  and  other  franchises,  and  vested 
private  rights  are  created  thereon,  these  are  rightfully  subject  to  taxa- 
tion as  other  property,  but,  as  other  property,  are  protected  during  the 
term  of  such  franchises  against  confiscation  or  spoliation. ' ' 

The  system  of  taxation  imposed  to  cover  franchises  should  be  one 
equitable  in  itself;  the  power  to  tax  should  not  be  used  as  a  means  of 
redressing  wrongs,  real  or  fancied,  the  result  of  lack  of  foresight  in 
the  past. 

The  solution. 

The  plan  proposed  by  this  Commission  for  the  solution  of  this  vexed 
question  is  to  place  the  entire  matter  of  the  taxation  of  all  franchises 
in  the  hands  of  the  State.  Corporate  franchises  would  then  be  subject: 
First,  to  the  fees  for  incorporation  now  charged,  which,  it  may  be 
pointed  out,  could  very  well  be  raised  without  imposing  any  hardship. 
Second,  they  would  be  subject  to  an  annual  franchise  tax  or  fee,  in  pro- 
portion to  the  capital  issued.  This  is  our  present  $20  tax  made  propor- 
tional. This  would  cover  the  "franchise  to  do  or  to  act,"  and  would 
suffice  for  all  general  franchises.  Third,  the  franchises  of  every  sort 
belonging  to  all  those  corporations  which  are  recommended  as  subjects 
for  State  taxation,  the  group  of  public-service  corporations,  the  banks 
and  the  insurance  companies,  would  be  covered  by  the  State  taxes  pro- 
posed for  them.  Fourth,  all  other  special  franchises  should  be  assessed 
by  the  State  Board  of  Equalization  and  pay  a  tax  of  1%  on  the  valu- 
ation so  assessed  and  not  be  taxed  locally.  There  are  not  many  such 
other  franchises.  The  only  important  group  is  that  of  water  companies. 
It  is  thought  that  this  will  cover  satisfactorily  all  the  different  fran- 
chises involved. 


272 


REPORT   OF    COMMISSION   ON   REVENUE   AND   TAXATION. 


CHAPTER  IX. 

TAXATION  OF  MONEY  AND  CREDITS. 


The  Constitution  requires  the  taxation  of  money  and  credits. 

The  Constitution  of  the  State  provides  that  the  word  "  property " 
shall  include  "  moneys,  credits,  bonds,  stocks,  dues,  franchises,  and  all 
other  matters  and  things  *  *  *  capable  of  private  ownership."  The 
Code  repeats  the  same  provision  and  further  defines  credits  as:  "those 
solvent  debts,  not  secured  by  mortgage  or  trust  deed,  owing  to  the  per- 
son, firm,  corporation,  or  association  assessed."  It  is  further  provided 
that  the  taxpayer  may  deduct  from  the  amount  of  his  credits  (but  from 
no  other  part  of  his  assessment),  the  amount  of  his  debts  due  to  bona 
fide  residents  of  California,  which  debts  are,  presumably,  subject  to 
assessment  against  the  creditor  as  solvent  credits  on  his  part. 

Despite  these  stringent  provisions  and  others  intended  to  carry  them 
into  effect,  such  as  compelling  the  taxpayer  to  state,  under  oath,  all  the 
moneys  due  him,  the  law  is  rarely  enforced,  and,  as  we  have  seen,  but 
a  very  small  amount  of  money  and  solvent  credits  is  ever  found  on  the 
tax  roll.  In  all  there  is  assessed  only  $43,000,000  of  money  and  solvent 
credits  in  the  aggregate  of  taxed  property  of  $1,600,000,000,  or  only 
2.7%.  Over  75%  of  this  is  found  in  San  Francisco  alone,  although 
the  roll  of  San  Francisco  is  less  than  one  third  of  the  total  roll  of  the 
State.  Furthermore,  what  stands  on  the  assessment  roll  as  "money 
and  solvent  credits"  is  for  the  most  part  an  assessment  against  the 
banks  and  is  not,  altogether,  what  it  purports  to  be,  but  is  for  the  most 
part  a  more  or  less  arbitrary  and  artificial  attempt  to  cover  the  property 
of  the  banks.  Only  in  the  rarest  instances  are  items  such  as  money  or 
solvent  credits  assessed  against  individual  citizens. 

Table  showing  the  Percentage  of  Money  and  Solvent  Credits  in  the  Total  Assessment 


Roll  of  each  County  in  1904. 


The  State 2.77 


Alameda 

Alpine 

Amador 

Butte 1 

Calaveras  

Colusa ._-    1 

Contra  Costa 1 

Del  Norte 

El  Dorado , 

Fresno 

Glenn... 1 

Humboldt 2, 

Inyo... 1 

Kern 

Kings... 2 

Lake 1 

Lassen 2, 

Los  Angeles 


684 

98 

387 

24 

504 

36 

,78 

239 

342 

569 

29 

37 

,50 

395 

12 

.15 

70 

.386 


Madera 

Marin 

Mariposa 

Mendocino     

Merced 

Modoc  . 

Mono 

Monterey 

Napa 

Nevada 

Orange  

Placer  

Plumas 

Riverside 

Sacramento 

San  Benito 

San  Bernardino 

San  Diego 

San  Francisco  .. 
San  Joaquin 


.386 

.268 

.037 

.786 

.176 

2.497 

.828 

.491 

2.132 

.785 

.419 

.954 

.409 

•    .202 

1.65 

.790 

.614 

.518 

6.69 

2.75 


San  Luis  Obispo...    1.35 

San  Mateo 373 

Santa  Barbara .639 

Santa  Clara 869 

Santa  Cruz .771 

Shasta .535 

Sierra .236 

Siskiyou  1.425 

Solano 546 

Sonoma 1.234 

Stanislaus...  1.014 

Sutter .423 

Tehama .928 

Trinity .846 

Tulare.. .719 

Tuolumne .266 

Ventura 1.041 

Yolo  1.729 

Yuba 2.705 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION.  273 

This  requirement  of  our  law  that  money  and  credits  should  be  taxed 
may  therefore  he  set  down  as  an  absolute  failure,  and  the  question 
arises  as  to  whether  it  can  be  enforced  and  whether,  if  it  can  not  be 
enforced,  it  should  not  be  entirely  repealed. 

Origin  of  the  attempt  to  tax  money  and  credits. 

This  provision  of  our  Constitution  was,  in  a  measure,  the  result  of  a 
long  discussion,  in  the  Constitutional   Convention   of  1879,  over  the 
various  ways  and  means  which  might  be  devised  to  make  the  money- 
lender, who  was  the  special  object  of  attack  by  a  large  element  in  that 
convention,  pay  some  taxes.     To  a  certain  group  in  that  convention  it 
was  abhorrent  that  any  man  known  generally  to  be  in  possession  of  a 
large  income  from  his  investments  of  moneyed  capital,  should  not  have 
his  name  on  the  tax  roll  as  an  open  and  declared  taxpayer.     No  con- 
sideration was  given,  by  these  extremists,  to  the  argument  put  forward 
by  many  of  the  more  conservative  members  that  such  money-lenders 
would  be  taxed  indirectly  through  the  operation  of  the  general  Law& 
taxing  property   and  that  taxing  him  again   upon   his   credits   might 
involve    double    taxation.     They   could  not  be   made   to  see  that  the 
money-lender    receives    his   income    net    after    taxes    had    been   paid, 
although  they  might  not  have  been  paid  in  his  name. 

Experience  of  other  states. 

Our  experience  in  California  in  regard  to  the  taxation  of  this  class  of 
intangible  property  is  the  exact  counterpart  of  the  experience  of  every 
one  of  the  American  states  which  have  ^attempted  to  enforce  similar 
laws.  None  of  them  ever  have  succeeded,  and  none  of  them  now  succeed, 
in  placing  any  considerable  part  of  this  class  of  property  on  the  assess- 
ment rolls. 

The  Wisconsin  Tax  Commission  in  1903  reported  that  after  every 
effort  on  their  part  to  bring  such  property  onto  the  rolls  they  had  suc- 
ceeded in  getting  thereon  only  an  amount  equal  to  5.33%  of  the  entire 
property  taxed  in  the  State,  and  that  percentage,  which  is  only  about 
double  ours,  included  also  mortgages  on  real  estate;  so  that  on  the 
whole  Wisconsin  is  considerably  worse  off  even  than  we  are. 

The  newspapers  have  recently  reported  that  Governor  Folk  of  Mis- 
souri has  made  a  strong  recommendation  in  favor  of  the  entire  abolition 
of  the  taxes  on  personal  property.  Correspondence  between  this  Com- 
mission and  a  similar  commission  at  work  in  Missouri,  shows  that  the 
matter  of  the  entire  repeal  of  the  laws  relating  to  this  class  of  personal 
property  is  under  serious  consideration  in  that  State. 

"Tax  inquisitors"  in  Ohio. 

Attempts  to  enforce  the  law  by  more  stringent  enforcement  of  admin- 
istrative  measures  have  been    tried  in  various  states,  but  invariably 

18— RT 


274  REPORT   OF    COMMISSION    ON   REVENUE   AND   TAXATION. 

with  the  same  results.     Ohio  went  so  far,  some  twenty  years  ago,  as  to 

authorize  the  employment  of  "tax  inquisitors"  at  the  public  expense. 

This  law  provided  that  the  county  commissioner,  the  county  auditor, 

and  the  county  treasurer,  or  a  majority  of  them  in  any  county,  might 

make  a  contract  for  a  number  of  years  with  some  private  individual  or 

firm  to  act  as  "tax  inquisitor"  for  the  county.     The  man  selected  was 

usually  some  one  living  outside  the  county,  away  from  local  political 

influence,  and  in  many  instances  the  same  individual  or  firm  had  the 

contract  for  several  counties.     He  would  then  proceed  to  organize  a  sort 

of  detective  bureau  and  examine  the  records  of  the  different  counties  to 

find  out  who  were  the  holders  of  mortgages  which  had  been  improperly 

omitted  from  the  tax  roll.     Investigation  was  also  made  as  to  moneys 

on  deposit  in  banks,  stocks  in  corporations,  and  the  like,  which  had 

been  omitted  from  the  tax  rolls.     When  such  a  piece  of  property  was 

found  which  was  subject  to  taxation  the  "inquisitor"  reported  the  fact 

to  the  county  auditor,  whose  duty  it  then  became  to  summon  the  owner 

before  him  to  show  cause  why  the  property  should  not  be  placed  on  the 

tax  roll  and  back  taxes  collected,  with  50%  penalty.     When  the  owner 

appeared  the  "inquisitor"  acted  as  prosecutor  and  laid  the  evidence 

before  the  auditor,  who  decided  the  case.     The  "inquisitor"  received  no 

compensation  except  a  percentage  of  the  amount  actually  recovered  and 

paid  into  the  treasury  upon  the  information  furnished  by  him,  and 

consequently  he  had  every  inducement  to  work  with  vigor. 

Even  this  stringent  law  was  a  failure  and  the  results  were  almost 
insignificant;  too  insignificant  at  least  to  make  it  worth  while  to  keep 
up  a  system  which  created  such  disturbance  and  aroused  so  much 
hostility. 

False  swearing*  in  taxpayers'  returns. 

Of  the  more  usual  attempts  to  uncover  personal  property  of  this  class 
through  the  machinery  of  oaths,  affidavits,  and  the  like,  Professor 
Daniels,  in  his  work  on  "Public  Finance,"  says: 

The  effectiveness  of  such  laws  is  inconsiderable.  If  Jove  laughs  at  lovers' vows,  he 
probably  guffaws  at  taxpayers'  oaths.  Even  the  Psalmist's  hasty  allegation  of  universal 
mendacity  needs  little  qualification  in  this  province  of  finance.  Where  the  taxpayer's 
conscience  is  tender  he  finds  (as  one  puts  it)  that  virtue  is  perforce  its  own  reward.  This 
phase  of  the  system  is  described  in  one  tax  report  as  "a  tax  upon  ignorance  and 
honesty,"  and  in  another  report  we  are  told  that  "the  payment  of  the  tax  on  personalty 
is  almost  as  voluntary  and  is  considered  in  pretty  much  the  same  light  as  donations  to 
the  neighborhood  church  or  Sunday-school." 

The  reason  for  the  failure  to  tax  money. 

It  seems,  then,  to  be  futile  to  try  to  tax  this  class  of  property,  and  the 
underlying  reason  for  the  failure  to  reach  it,  and  for  the  objection  which 
people  in  general  have  to  paying  it,  is  probably  to  be  found  in  the  funda- 
mental fact  that  it  should  not  be  taxed  at  all.    It  is  the  universal  opinion 


REPORT   OF   COMMISSION    ON    REVENUE   -VXD    TAXATION.  275 

among  authorities  on  public  finance  and  economists  in  general  that  the 
laws  relating  to  the  taxation  of  this  class  of  property,  eo  nomine,  should 
be  repealed. 

The  true  principle  illustrated  by  California  mortgage  tax. 

The  essential  principles  involved  are  very  clearly  recognized  m  the 
mortgage  tax  law  of  California  and   are   further   demonstrated  by  the 
experience  which  we  have  had  in  the  administration  of  that  law.     Our 
mortgage  tax,  as  laid  clown  by  the  Constitution,  concedes  that  the  tax- 
ation of  the  property  pledged  as  security  for  a  loan,  and  the  taxation 
of  the  loan  as  well,  would  be  double  taxation,  and  therefore  provides 
that  a  mortgage  shall  be  treated   as  an  interest  in  the  property  upon 
which  it  is  a  lien,  and  although  it  is  to  be   assessed  to  the  mortgagee, 
the    mortgagor    enjoys   a  deduction    from   the  total  assessed   value  of 
his  property  equal  to  the  amount  of  his  mortgage.     This   recognizes 
distinctly  that  there  is  but  one  piece  of  property,  in  which  two  persons 
are  interested.    The  same  thing  is  equally  true  of  other  forms  of  credit. 
If  a  man  borrows  money  with  which  to  purchase  a  stock  of  merchan- 
dise, there  is  a  similar  division  of  interests,  and  it  is  amply  sufficient  to 
tax  the  merchandise  as  a  whole  and  to  pay  no  attention  to  the  credit. 
If  a  tax  is  levied  on  the  credit,  then  the  borrower  should  be  allowed 
to  deduct  from  the  goods  he  bought  with  the  money  borrowed  an  amount 
equal  to  the  credit,  which  might  then  be  assessed  in  the  name  of  the 
creditor. 

A  tax  on  money  will  be  shifted. 

Our   experience  with    the  taxation  of    mortgages  has  demonstrated 
beyond  a  peradventure,  or  a  doubt,  that  the  holder  of  the  property  pays 
the  entire  tax.     He  pays  taxes  not  only  upon  that  part  of  the  property 
assessed  to  him,  but  upon  the  mortgage  as  well,  the  latter  in  the  form 
of  a  higher  rate  of  interest  than  he  would  otherwise  have  to  pay.     If 
our  tax  laws  could  be  enforced  in  regard  to  the  taxation  of  credits,  ap- 
proximately the  same  results  would  occur.     The  rate  of  interest  on  all 
loans  would  be  enough  higher  to  enable  the  lender  to  pay  the  tax  and 
also  to  compensate  him  for  any  additional  risk  which  this  method  of  taxa- 
tion involved,  and  for  any  additional  trouble  to  which  he  might  be  put 
by  being  compelled  to  pay  the  tax.     The  law,  as  it  at  present  stands  in 
California,  requires  not  only  the  assessment  of  the  property  held  by 
debtors  and  purchased  by  them  with  the  money  they  have  borrowed, 
but  also  the  taxation  of  the  credits,  and  this,  if  enforced,  would  neces- 
sarily result  in  a  duplication  of  values  and  in  double  taxation. 

The  amendment  to  our  Constitution  prepared  by  the  Committee  of 
Forty  in  San  Francisco  and  passed  by  the  last  Legislature,  which  came 
up  for  the  direct  vote  of  the  people  in  November  of  this  year,  proposes 
for  five  years  to  permit  the  borrower  and  the  lender,  in  the  case  of  a 


276  REPORT   OP   COMMISSION   ON   REVENUE   AND   TAXATION. 

mortgage  on  real  estate,  to  make  any  contract  they  please  as  to  which 
of  them  shall  pay  the  tax.  The  result  of  this,  if  adopted  by  the  people, 
will  be,  as  shown  by  the  experience  of  Massachusetts  and  Wisconsin, 
where  similar  systems  are  now  in  force,  that  the  borrower  will,  in  almost 
every  case,  elect  to  pay  all  the  taxes  himself  and  thus  secure  the  loan 
at  the  lowest  rate  of  interest  that  the  market  can  afford,  uncomplicated 
by  any  considerations  in  regard  to  taxes,  while  the  lender  will,  as  is 
inevitable,  reduce  the  rate  of  interest  by  an  amount  corresponding  to 
the  tax.  The  same  privilege  which  will,  if  the  amendment  be  adopted, 
be  extended  to  credits  secured  by  mortgages  on  real  estate,  should  be 
extended  to  other  credits,  for  they  all  have  essentially  the  same 
economic  character. 

Credits  not  property  in  the  economic  sense. 

Although  credits  may  be,  from  the  point  of  view  of  law,  included 
within  the  term  "property,"  they  are  not  property  in  any  true  economic 
sense.     The  difficulty  which  has  been  felt  by  many  people  in  under- 
standing the  nature  of   credits  compared  with  other  property,  so  far 
as  their  treatment  in  the  revenue  system  is  concerned,  arises  from  a 
confusion  of  thought  as  to  the  nature  of  the  property  tax.     There  are 
two  ways  of  conceiving  of  the  property  tax,  one  of  which  makes  it  a 
personal  tax  and  the  other  an  objective  or  real  tax  (from  res,  meaning 
"things").     That  is,  we  may  start  out  with  the  idea  of  taxing  every 
man  in  proportion  to  his  property,  in  which  case  the  property  becomes 
the  mere  measure  of  the  amount  which  the  man  ought  to  contribute, 
and  the  tax  is  essentially  a  personal  tax.     If  this  is  the  view  held  as 
to  the  nature  of  the  property  tax  and  the  provisions  of  the  revenue 
laws  are  shaped   in   accordance   therewith,  it  would  be   natural   and 
logical  to  include   credits   among   the  items  of  property  by  which   a 
man's  taxes  are  to  be  measured.     This  was  undoubtedly  the  original 
view  concerning   the    property  tax.     But   on  account  of   the    general 
impossibility  of  administering  a  tax  upon  this  plan,  it  has  gradually 
been  abandoned.     The  other  view,  that  which  regards  the  property  tax 
as  an  objective  or  real  tax,  is  to  levy  a  tax  upon  all  property  wherever 
found,  without  regard  to  who  may  be  its  owner,  make  the  tax  a  lien 
upon  the  property,  and  let  the  owner,  or  anybody  else  who  is  willing 
to  do  so,  come  forward  and  remove  the  lien  by  payment  of  the  tax. 
Our  California  property  tax  is  essentially  a  real  tax,  a  tax  on  things 
and    not   on    persons.     Thus    property  may  be  assessed    to    unknown 
owners,  and  an  error  in  the  name  of   the    owner  is  not    fatal  to  the 
assessment,  provided   the   property   is    correctly   described.     The    sole 
exception  is  this  attempt  to  include  credits  among  the  items  of  property 
which  shall  be  taxable,  and  it  is  largely  on  account  of  the  fact  that 
this  provision  is  out  of  accord  with  the  rest  of  the  law  that  it  is  found 
to  be  unenforceable. 


REPORT   OF   COMMISSION    ON    REVENUE    AXI>    TAXATION.  L'77 

The  property  tax  a  tax  on  things,  not  persons. 

If  we  take  the  view  that  the  property  tax  should  be  a  real  tax,  based 
upon  things  or  property  without  respect  to  who  may  own  them,  then  it 
is  illogical  to  regard  a  credit  as  property.     A  credit  is  merely  a  right 
on  the  part  of  the  creditor  to  receive  and  to   enforce  payment  of  the 
obligation  due   from   some  other  person.     The  notes,  bonds,  or  other 
documents  embodying  the  credits  merely  stand  as  evidence  of  the  exist- 
ing contract.     The  very  existence  of  the  documentary  proof,  and  the 
phraseology  in  which  many  of  these  documents  are  couched,  demon- 
strate very  clearly  that  the  creditor  himself  is  not  in  possession  of  the 
money,  or  lands,  or  the  goods  which  secure  the  loan  and  the  transfer  of 
which  to  the  debtor  brought  the  credit  into  existence.     The  creditor  has 
only  the  right  to  receive  these  things,  or  similar  things,  back  at  some 
future  time.     If  the  United  States  Government  borrows  $100,000,000 
upon  bonds — which  are  merely  its  promise  to  pay — there  is  a  transfer 
of  $100,000,000  in  gold  from  the  buyers  of  the  bonds,  or  the  creditors, 
to  the  United  States  treasury.     The  creditors  who  hold  the  bonds  feel 
themselves  no  poorer  than  before,  but  no  one  would  seriously  contend 
that  by  this  simple  transaction  the  property  or  wealth  of  the  country 
has  been  increased  a  particle.     There  is  only  $100,000,000  of  real  wealth 
involved,  which  has  passed  into  the  possession  of  Uncle  Sam  from  that 
of  his  creditors,  and  which  will  be  returned  when  the  bonds  are  paid. 
Nor  would  any  one  seriously  contend  that  the  payment  by  the  United 
States  of  some  of  its  indebtedness  and   the  cancellation  of  the  bonds 
destroyed  any  wealth.     Standing  against  every  credit  there  is  an  equal 
amount  of  indebtedness,  and  the  maturing  of  this  indebtedness  destroys 
no  material  wealth,  nor  does  its  creation  add  anything  to  the  material 
wealth  of  the  world  or  to  the   substantial  property  which  has  to  bear 
the  burden  of  taxation.     To  consider  that  credits  are  property  as  well 
as  the  goods   and   other  property  by   which  they  are  secured,  is  like 
adding  together  two  sides  of  an  account — the  assets  and  the  liabilities. 
To  treat  credits  as  property,  and  also  the  lands,  goods,  and  other  forms 
of  wealth  in  the  hands  of  the  community,  would  result  in  an  obvious 
duplication  of  values,  and  if  taxes  were  levied  upon  that  base  would 
result  in  double  taxation,  unless  the  debtor  were  allowed  to  deduct  the 
amount  of  his  debts  in  the  same  way  that  we  permit  him  to  do  in  the 
case  of  mortgages.     But  our  existing  law  does  not  permit  that,  save  and 
except  that  the  debtor  may  deduct  his   debts  from  the  amount  of  his 
credits.     Illustrations  of  the  way  in  which  the  taxation  of  credits  works 
objectionable  double  taxation  might  be  multiplied  and  the  argument 
extended  indefinitely,  but  the  above  illustrations  ought  to  be  sufficient 
to  make  clear  the  fundamental  principles  involved. 


278  REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 

Objections  to  the  foregoing  view. 

The  objectors  to  this  view  may  raise  the  question,  Would  you,  then, 
permit  the  rich  man  to  escape  taxation  entirely?  Thus  one  of  the 
delegates  to  the  Constitutional  Convention  in  1879  said  in  discussing 
the  taxation  of  mortgages:  "I  know  a  man  who  loans  $240,000  and 
receives  quarterly  a  high  rate  of  interest,  a  rate  of  interest  which  has 
broken  many  a  man  who  attempted  to  pay  it,  and,  sir,  he  pays  a  tax 
on  $3,500,  being  the  assessed  value  of  the  house  in  which  he  lives. 
And  yet  his  income  in  the  way  of  interest  is  nearly  $40,000  a  year." 
This  point  of  view  overlooks  the  very  important  fact  that  the  property 
in  which  the  money-lender  is  interested  can  be  made  to  contribute  its 
share  of  the  taxes  and  thus  indirectly,  as  a  temporary  partner  in  that 
property,  the  money-lender  himself  is  taxed.  The  $40,000  a  year,  or 
any  other  sums  received  in  interest,  will  be  the  net  amount  due  after 
the  payment  of  the  tax.  The  attempt  to  make  the  money-lender  pay 
a  tax  out  of  that  which,  under  the  workings  of  the  law  of  supply  and 
demand,  is  the  proper  compensation  for  the  use  of  his  capital,  is  on  a 
par  with  the  attempt  to  enforce  a  usury  law.  We  know  that  usury  laws 
can  not  be,  and  never  have  been,  effective.  So  long  as  men  are  not 
obliged  to  loan  their  capital  at  a  rate  of  interest  fixed  by  the  govern- 
ment, just  so  long  they  will  not  accept  a  rate  of  interest  below  the 
market  rate.  So  long  as  men  are  not  compelled,  and  can  not  be  com- 
pelled, to  loan  their  money  to  those  who  will  not  pay  the  taxes  thereon, 
it  will  be  impossible  to  compel  the  money-lender  to  pay  the  tax,  and 
if  he  advances  it  in  the  first  place,  to  prevent  him  from  shifting  it  to 
the  borrower  in  the  form  of  a  higher  rate  of  interest. 

No  inequality  in  not  taxing*  credits. 

Nor  is  there  any  inequality  involved  in  thus  permitting  the  money- 
lender to  take  his  return  net  without  consideration  of  the  taxes.  The 
borrower  has  the  property  in  his  custody  and,  so  long  as  he  has  it,  he 
is  expected  to,  and  in  his  own  interest  will,  pay  all  the  cost  of  its  main- 
tenance and  protection.  He  will  see  to  it  that  it  is  protected,  insured, 
repaired,  and  that  everything  else  is  done  which  is  necessary  to  con- 
serve it.  Why  should  he  not,  therefore,  so  long  as  the  property  is  in 
his  possession  and  so  long  as  he  enjoys  the  use  of  it,  pay  among  the 
other  expenses  of  its  maintenance  the  expense  for  government  protec- 
tion? If  there  is  any  proportion  of  the  burden  of  the  expense  of  main- 
tenance, whether  it  be  for  taxation,  insurance,  repairs,  or  what  not, 
which  may  equitably  be  charged  against  the  creditor,  we  may  rest 
assured  that  in  the  long  run  these  charges  will  be  transferred  to  him. 
The  proper  apportionment  of  expenses  between  the  two  parties  interested 
will  be  adjusted  by  the  operation  of  the  great  law  of  supply  and  demand 
which  controls  and  regulates  the  rate  of  interest.  Any  attempt  to 
restrict  the  free  operation  of  this  law  will  be  foredoomed  to  failure. 


REPORT    OF    COMMISSION    ON    REVENUE    AND    TAXATION'.  279 

The  Wisconsin  Tax  Commission  reporting-  on  credits. 

In  closing  a  similar  argument  in  regard  to  the  taxation  of  credits  the 
Wisconsin  Tax  Commission  in  its  report  of  1903  said:  "It  is  not  at  all 
surprising  that  laws  requiring  the  assessment  of  credits,  without  cor- 
responding reduction  in  the  assessment  of  the  property  of  debtors,  have 
usually  been  resisted  and  evaded,  or  that  assessing  officers  have  gener- 
ally made  little  effort  to  enforce  them.  Laws  which  are  fundamentally 
wrong  are  incapable  of  substantial  enforcement  among  free  and  enlight- 
ened people;  and  the  fact  that  the  assessment  laws  under  discussion 
have  never  been  effectually  enforced  is  evidence  that  there  is  some 
radical  defect  in  the  principle  upon  which  such  laws  are  founded.  It 
would  not  be  wholly  correct  to  assert  that  in  their  practical  rejection  of 
such  laws  the  people  and  their  assessors  have  shown  themselves  wiser 
than  their  lawmakers;  but  is  it  not  true  that  by  instinct  or  intuition 
they  have  arrived  at  correct  conclusions  which  as  yet  have  not  been 
consciously  perceived  by  the  majority  of  legislators?  It  is  not  doubted, 
however,  that  the  majority  of  legislators  when  called  upon  to  take 
action  in  the  matter  will  perceive,  as  the  majority  of  persons  who  study 
the  subject  believe,  that  the  present  laws  requiring  the  taxation  of 
credits  are  wrong  in  principle  and  so  far  as  enforced  produce  injustice, 
and  should  be  no  longer  tolerated." 

If  the  law  is  a  dead  letter  should  it  be  repealed? 

It  may  be  urged  that  this  part  of  our  revenue  law,  as  demonstrated 
by  the  showing  already  made,  is  practically  a  dead  letter,  and  that, 
consequently,  there  is  no  necessity  for  so  long  a  discussion  as  this  or 
for  any  repeal.  This  does  not  cover  the  entire  case.  The  law,  although 
practically  a  dead  letter,  is  a  continual  threat  against  all  credits,  and 
when  in  rare  instances  enforced  is  enforced  against  those  who  are  least 
able  to  bear  the  burden.  Not  the  least  of  its  ill  effect  is  that  it  injures 
the  business  community  by  compelling,  now  and  again,  the  use  of 
roundabout  methods  for  the  accomplishment  of  simple  things  and  that 
it  lessens  the  respect  of  men  for  ordinary  law  by  compelling  them  to 
resort  to  underhanded  means  to  accomplish  things  which  are  perfectly 
just  and  honorable,  while  the  attempt  to  enforce  the  law  by  oaths  or 
sworn  declarations  leads  to  a  tremendous  amount  of  perjury. 

The  deduction  of  debts  a  failure. 

It  has  sometimes  been  urged  that  if  the  attempt  to  tax  credits  leads 
to  double  taxation,  the  remedy  is,  not  to  ignore  credits  entirely,  but  to 
continue  to  attempt  to  tax  them  while  permitting  the  debtor  to  deduct 
the  amount  of  his  debts  from  the  entire  amount  of  his  personal  prop- 
erty. This  would  prevent  double  taxation,  and  to  that  extent  remove 
one  of  the  fundamental  objections  to  the  taxation  of  credits.     But  the 


280  REPORT   OF    COMMISSION    ON    REVENUE    AND    TAXATION. 

difficulty  is  that  the  government  has  no  assurance  that,  when  it  allows 
a  debtor  to  deduct  his  debts,  it  will  be  able  to  find  the  credit  and  to 
make  the  creditor  pay  the  tax  thereon.  Certain  states  have  under- 
taken to  avoid  this  difficulty  by  the  shrewd  device  of  permitting  no 
deduction  for  debt  save  in  those  cases  where  the  debtor  proves  that  his 
creditor  has  paid  the  tax  upon  the  amount  of  the  loan,  or,  barring  that, 
affords  the  government  such  evidence  as  to  who  the  debtor  is  and  the 
amount  of  his  debt  that  the  government  itself  can  enforce  collection. 
The  Wisconsin  Tax  Commission,  just  referred  to,  discussing  the  same 
point,  says:  "As  precisely  the  same  aggregate  of  'property'  would  be 
assessed  under  either  plan,  it  follows  of  course  that  those  who  are  neither 
debtors  nor  creditors  would  have  no  greater  burden  under  the  one  plan  than 
under  the  other.  The  proposition,  then,  is  one  affecting  debtors  and 
creditors  only,  and  therefore  the  real  question  is  whether  the  legislature 
shall  interfere  between  debtor  and  creditor  and  attempt  by  law  to  determine 
the  portion  of  taxes  which  each  shall  pay  on  account  of  property  in  which 
both  are  interested,  or  whether  the  State  shall  look  only  to  the  possessor 
of  the  actual  property  for  the  required  revenue,  leaving  the  adjustment 
of  the  burden  between  debtor  and  creditor  to  be  worked  out  by  natural 
economic  laws.  In  other  words,  the  proposition  to  tax  the  creditor 
directly  is  not  to  secure  additional  revenue,  nor  to  increase  the  total 
amount  of  property  to  be  assessed  so  as  to  lessen  the  burden  of  the  non- 
indebted  property  owner,  but  solely  to  benefit  the  debtor — to  secure  as 
between  him  and  his  creditor,  if  possible,  a  more  equitable  adjustment 
of  the  tax  burden  to  be  imposed  on  account  of  property  in  which  both 
are  interested  than  would  be  accomplished  by  the  natural  laws  of  trade 
and  commerce  without  arbitrary  legislative  interference.  Such  plan 
necessarily  contemplates  that  the  tax  to  be  imposed  upon  the  creditor 
shall  not  become  a  burden  upon  the  debtor." 

But,  as  we  have  seen  in  the  case  of  mortgages,  the  tax  upon  credits 
is  inevitably  shifted  to  the  borrower  in  the  form  of  a  higher  rate  of 
interest.  This  shifting  is  so  inevitable  and  so  natural  that  it  is  all  the 
more  surprising  that  the  argument  should  sometimes  be  seriously 
advanced  to  the  effect  that  there  is  no  shifting.  As  the  Wisconsin 
commission  above  referred  to  very  clearly  points  out,  interest  is  the 
price  paid  for  the  use  of  capital  and  is  closely  analogous  to  the  price 
paid  for  goods.  Goods  which  are  taxed  will  cost  the  consumer  more 
than  if  they  ^yere  free  from  taxation.  If  the  merchant  can  not  sell 
those  goods  at  a  price  which  will  return  him  a  reasonable  profit  on  his 
transaction  and  reimburse  him  for  any  taxes  advanced,  he  will  decline 
to  handle  those  goods.  In  the  same  way  a  capitalist  will  not  loan  his 
money  unless  he  gets  the  market  rate  of  interest  upon  his  loan,  and  if 
the  lender  is  taxed  he  will  require  a  rate  which  will  yield  him  the 
market  rate  of  interest  net  after  the  payment  of  taxes. 


REPORT   OP    COMMISSION    ON    REVENUE    AND    TAXATION.  2S1 

Shifting*  of  the  tax  can  not  be  prevented  by  law. 

The  laws  designed  to  prevent  the  shifting  of  the  tax  from  the  creditor 
to  the  debtor  have  always  failed,  and  alwa}rs  will  fail,  in  the  same  way 
that  the  usury  law  fails,  and  moreover  they  inevitably  work  to  injure 
rather  than  to  aid  the  debtor,  whose  interests  they  are  supposed  to 
foster.  Our  California  code  has  one  paragraph  which  has  been  char- 
acterized by  one  of  the  Code  Commissioners  as  an  "  academic  state- 
ment." That  paragraph,  however,  recognizes  the  essential  truths  which 
we  have  been  trying  to  expound  in  connection  with  credits  so  far  as 
those  truths  or  principles  are  applicable  to  the  taxation  of  stocks  or 
bonds.  That  paragraph  is  Section  3608,  the  first  sentence  of  which 
reads:  "Shares  of  stock  in  corporations  possess  no  intrinsic  value  over 
and  above  the  actual  value  of  the  property  of  the  corporation  which 
they  stand  for  and  represent;  and  the  assessment  and  taxation  of  such 
shares,  and  also  all  the  corporate  property,  would  be  double  taxation. 
Therefore,  all  property  belonging  to  corporations  *  *  *  shall  be  assessed 
and  taxed.  But  no  assessment  shall  be  made  on  shares  or  stock  in  any 
corporation  *  *  *."  This  paragraph,  academic  or  not,  might  be  para- 
phrased with  perfect  accuracy  as  follows:  Credits  possess  no  intrinsic 
value  over  and  above  the  actual  value  of  the  'property  ivhich  they  stand 
for  and  represent,  and  the  assessment  and  taxation  of  credits  and  also  of 
the  property  ivhich  secures  them  would  be  double  taxation. 

Recommendation  postponed. 

In  view  of  the  foregoing  considerations,  the  Commission  recommends 
that,  at  some  future  time,  the  definition  of  property  subject  to  taxation 
be  amended  so  as  to  definitely  exclude  moneys,  credits,  and  dues. 

This  will  apparently  strike  from  the  rolls  2.77%  of  the  present 
amount,  but  such  loss  will  be  only  an  apparent  loss;  for  of  the  amount 
of  money  and  solvent  credits  now  on  the  rolls,  this  2.77%  is,  as  was 
pointed  out  before,  merely  an  arbitrary  assessment  against  the  banks, 
and  if  the  banks  are  taxed  in  some  other  and  more  equitable  way,  this 
item  would  practically  disappear  from  the  rolls  in  any  event.  How  much 
of  the  $43,000,000  now  assessed  on  the  rolls  is  assessed  against  individ- 
uals is  hard  to  determine,  but  that  it  is  a  very  small  amount  is  abso- 
lutely certain.  The  sharper  and  more  equitable  the  assessment  of  other 
classes  of  property  which  would  result  from  the  abolition  of  this 
provision  would  more  than  compensate  the  government  for  any  loss  in 
revenue. 

This  recommendation  would  not  work  the  exemption  of  any  persons 
from  taxation,  but  would  amount  to  a  practical  abolition  of  certain 
evasions,  by  "stopping  the  taxes  at  the  source."  The  money-lender 
would  have  no  excuse  for  asking  more  than  the  market  rate  of  interest 
net  after  payment  of  taxes.     If  any  portion  of  the  burden  of  taxation 


2S-J  REPORT   OP   COMMISSION   ON   REVENUE   AND   TAXATION. 

belongs  to  him  it  will  be  placed  upon  him  by  the  workings  of  the  law 
of  supply  and  demand. 

This  recommendation  not  urged  at  the  present  time. 

While  the  Commission  is  convinced  that  the  reasoning  in  this  chap- 
ter is  in  every  way  sound  and  wishes  to  go  on  record  as  favoring  the 
exclusion  of  money,  credits,  and  dues  from  the  list  of  taxable  property, 
yet  it  does  not  press  this  recommendation  at^the  present  time. 

The  chief  reason  for  not  pressing  this  recommendation  now  is  that 
to  do  so  might  tend  to  confuse  the  main  issue,  which  is  the  separation 
of  State  from  local  taxation  as  to  sources  of  revenue.  A  considerable 
proportion  of  the  voters,  it  is  thought,  still  hold;the  views  which  led  to 
the  embodiment  of  this  provision  in  the  Constitution.  If  the  proposal 
to  abolish  the  direct  taxation  of  money  and  credits  were  submitted  to 
the  people  at  the  same  time  as  the  proposal  to  separate  State  from  local 
taxation,  those  opposed  to  the  former  could  express  their  disapproval 
thereof  only  by  voting  against  every  change,  including  separation. 
Separation  is  the  paramount  issue,  and  the  people  should  have  an 
opportunity  to  express  themselves  on  that  point  alone  clear  of  any 
confusion  which  might  arise  if  minor  issues  were  attached  thereto  in 
the  form  of  riders. 


REPORT   OF    COMMISSION   ON   REVENUE   AND    TAXATION.  283 


CHAPTER  X. 

THE  COST  Of  COLLECTING  TAXES. 


Items  entering-  into  the  cost  of  collecting-  taxes. 

Early  in  its  work  the  Commission  made  an  investigation  of  the  cost 
of  assessing  property  and  of  levying  and  collecting  taxes.  The  following 
items  enter  into  this  cost: 

1.  The  entire  cost  of  maintaining  the  assessor's  office,  in  each  county. 

2.  The  entire  cost  of  maintaining  the  tax  collector's  office  in  each 
county. 

3.  The  entire  cost  of  maintaining  the  State  Board  of  Equalization. 

4.  A  relatively  small  part  of  the  cost  of  maintaining  the  auditor's 
office  in  each  county;  namely,  that  part  of  the  auditor's  expenses  and 
time  devoted  to  checking  and  charging  the  assessment  roll  and  the 
receipts  from  taxes.  The  greater  part  of  the  auditor's  work  relates  to 
expenditures. 

5.  The  pay  and  expenses  of  the  county  board  of  supervisors  while 
sitting  as  a  county  board  of  equalization. 

Where  a  saving-  is  possible.   Biennial  revaluation  of  real  property. 

The  only  point  at  which  any  material  saving  can  be  made  is  in  the 
cost  of  maintaining  the  assessor's  office.  A  saving  could  be  made  here 
by  requiring  that  the  general  valuation  of  real  property  be  made  less 
frequently  than  once  every  year.  It  is  the  practice  in  many  states  to 
make  a  new  assessment  of  real  estate  not  once  every  year,  as  in  Cali- 
fornia, but  once  every  two,  three,  or  four  years,  and  in  a  few  states  at 
even  longer  intervals.  In  these  cases  the  only  changes  made  in  the 
rolls  are  those  necessitated  by  the  destruction  or  loss  of  property  or  by 
n<w  construction.  The  following  citation  from  the  Iowa  statutes  will 
serve  as  an  illustration: 

Personal  Property — Real  Estate— Building*.  Property  shall  be  taxed  each  year.  The 
personal  property  shall  be  listed  and  assessed  each  year  in  the  name  of  the  owner 
thereof  on  the  first  day  of  January.  Real  estate  shall  be  listed  and  value>l  in  each  odd 
numbered  year,  and  in  each  year  in  which  real  estate  is  not  regularly  assessed  the 
assessor  shall  list  and  assess  any  real  property  not  included  in  the  previous  assessment, 
and  also  any  buildings  erected  since  the  previous  assessment,  with  a  minute  of  the 
tract  or  lot  of  land  whereon  the  same  are  situated,  and  the  ami  it  or  shall  thereupon  enter 
the  taxable  value  of  such  huildings  on  the  tax  list  as  a  part  of  the  real  estate  to  be 
taxed;  but  if  such  buildings  are  erected  by  another  than  the  owner  of  the  real  estate, 
they  shall  be  listed  and  assessed  to  the  owner  as  personal  property. 


284  REPORT   OF    COMMISSION    ON   REVENUE   AND    TAXATION. 

It  is  claimed  for  such  a  system  that  it  not  only  saves  a  part  of  the 
cost  of  making  up  the  assessment  roll,  but  that  it  results  in  a  decided 
improvement  in  the  valuation  of  real  property.  The  making  up  of  a 
new  roll  of  real  property  becomes  a  more  serious  and  less  perfunctory 
operation  if  undertaken  once  every  two  years  than  if  undertaken  every 
year. 

On  the  other  hand,  it  is  claimed  that  real  property  in  many  parts  of 
California  is  increasing  in  value  so  rapidly  that  an  annual  revaluation 
is  necessary  in  order  to  equalize  values.  An  examination  of  the  assess- 
ors' returns  from  year  to  year,  however,  fails  to  show  very  much  strength 
in  this  argument.  Increases  in  the  assessment  roll  are  not  as  steady 
as  they  should  be  and  come  more  as  a  result  of  changes  in  the  personnel 
of  the  office,  or  raises  by  the  State  Board,  than  as  reflecting  the  actual 
changes  in  the  value  of  the  property. 

Biennial  assessment  of  real  estate  would  save  probably  one  fourth  of 
the  expense  now  connected  with  taxation,  or  at  least  $100,000  per  annum, 
and  would  probably  give  us  a  better  valuation  of  the  property. 

The  table  appended  to  this  chapter  shows  the  cost  of  the  tax  system 
to  be  about  three  quarters  of  a  million  dollars  per  annum,  or  3%  of  the 
taxes  collected.  The  cost  is  proportionately  highest  in  the  counties 
where  only  a  small  amount  of  taxes  is  collected,  and,  generally  speak- 
ing, proportionately  lowest  in  counties  where  the  revenues  are  largest- 
This  is  due  to  the  fact  that  a  certain  initial  expense  is  necessary  to  run 
the  offices,  no  matter  how  small  the  taxes. 


REPORT   OF   COMMISSION   ON   REVENUE   AND   TAXATION. 


2sr, 


COST  OF  COLLECTING  STATE  AND  COUNTY  TAXES  (1904). 


County. 


Assessor. 


Tax 

Collector. 


Auditor. 


Super- 
visors. 


Total  Cost. 


Amount 
Collected. 


►■3 

3.2  o 
.5  o 


Alameda 

Alpine  . 

Amador 

Butte ... 

Calaveras  

Colusa 

Contra  Costa 
Del  Norte  ... 

El  Dorado 

Fresno .. 

Glenn 

Humboldt   . . 

Inyo 

Kern  .. 

Kings 

Lake  ... 

Lassen  

Los  Angeles. 

Madera 

Marin 

Mariposa 

Mendocino 

Merced 

Modoc 

Mono 

Monterey 

Napa  ..." 

Nevada 

Orange 

Placer . 

Plumas 

Riverside 

Sacramento  . 
San  Benito  .. 
San  Bernardino 

San  Diego 

San  Francisco 
San  Joaquin  . 
San  LuisObispo 

San  Mateo 

Santa  Barbara 
Santa  Clara... 
Santa  Cruz  ... 

Shasta 

Sierra  

Siskiyou 

Solano  

Sonoma 

Stanislaus 

Sutter 

Tehama 

Trinity -- 

Tulare 

Tuolumne 

Ventura 

Yolo.... 

Yuba 


$38,950  00 
444  25 
3,750  00 
6,515  30 
2,019  00 
4,082  00 
3,250  00 
600  00 
4.322  55 
6,131  00 
3,010  00 

11,279  09 
1,400  00 
5,650  00 
1,951  00 
1,675  00 
1,900  00 

52,304  51 
3,053  50 
2,892  95 
2,950  00 
5,540  00 
3,500  00 
1,619  00 
1,230  00 
4,659  15 
3,400  00 
5,950  00 
9,613  00 
5,469  70 
1,500  00 
5,800  00 

14,000  00 

2,800  00 

7,589  88 

4,1)31  25 

100,200  00 

12,095  00 
5,492 
4,780 
3,314 

11,295 
2,736  40 
4,050  00 
L.832  50 
2,400  00 
3,500  00 
6,000  00 
4,715  00 
2.174  50 
2.313  00 
3,110  00 
3,600  00 
3,'.i20  53 
5,497  65 
3,000  00 
3,400  00 


50 
00 
72 

79 


$18,163  48 

300  00 

500  00 

3,000  00 

2,009  00 

1,776  10 

5,644  20 

1,040  00 

927  50 

10,350  81 

1,602  57 

4,072  70 

1,283  00 

4,566  60 

1,941  70 

914  40 

750  00 

41,065  93 

2,511  33 

1,950  00 

1,200  00 

4,428  13 

1,360  00 

1,350  00 

635  00 

2,252  75 

2,627  08 

1,319  50 

2,460  00 

1,000  00 

300  00 

3,468  34 

3,706  00 

1,200  00 

5,233  60 

9,123  15 

68,503  89 

3,673  00 

3,650  00 

3,025  50 

2,838  17 

9,336  59 

2,909  92 

1,500  00 

662  00 

1,500  00 

2,085  00 

2,860  00 

1,390  35 

667  60 

1,680  00 

l,45o  00 

4,039  00 

2,031  57 

4,132  85 

3,703  To 

1,565  00 


$3,656  20 


2,160  00 


200  00 

1,635  00 

715  00 

550  00 


700  00 


500  00 
325  00 


25  00 

1,100  00 

2,600  00 

750  00 


550  00 

1,641  00 

1,175  00 

23  00 

3,650  00 

209  00 
650  00 

430  00 

900  00 



925  00 

1,245  00 

Totals $428,329  72  $271,142  04  !$26,314  20 


$625  00 
250  00 
166  00 
300  00 
200  00 
500  10 
350  00 
125  00 
166  00 
208  00 
250  00 
250  00 

" 300  00 
266  00 
125  00 
300  00 
750  00 
250  00 
225  00 
250  00 
208  00 
250  00 
104  00 
300  00 
250  00 
417  00 
375  00 
208  00 
250  00 
400  00 
208  00 
375  00 
250  00 
250  00 
375  00 

3,700  00 
375  00 
292  00 
250  00 
250  00 
708  00 
250  00 
208  00 
250  00 
208  00 
250  00 
333  00 
250  00 
146  00 
208  00 
104  00 
417  00 
225  00 
300  00 
208  00 
208  00 


$61,394  68 
904  25 
4,416  00 
9,815  30 
4,228  00 
6,358  20 
9,244  20 
1,765  00 
5,416  05 

18,849  81 
4,862  57 

15,601  79 
2,883  00 

12,151  60 
4,873  70 

3.264  40 
2,950  00 

94,119  44 

6,514  83 

•    5,067  95 

4,000  00 

10,501  13 
5,110  00 
3,098  00 

3.265  00 
9,761  90 
7,194  27 
7,644  50 

12,831  00 
0,719  70 

2.200  00 
11,117  34 
10,256  00 

4,273  00 

13,073  48 

18,079  40 

172,403  89 

16,143  00 

9,434  50 

8,264  50 

7,052  89 

21,340  18 

6,326  32 

5,758  00 

2,744  50 

4,108  00 

7,635  00 

0,193  00 

6,355  35 

2,988  10 

4.201  00 
4,654  00 
8,972  00 
6,177  10 
0,030  50 

8,156  :;» 

5,173  00 


$1,679,439  76 

7,373  27 

95,708  04 
300,270  78 
L20.969  90 
187,463  26 
339,133  70 

70,426  22 

92,363  82 
576,021  40 
201,681  68 
358,101  89 

52,479  35 
322,029  16 
128,070  79 

74,331  35 

76,245  22 

2,420,965  44 

131,400  99 

100,212  92 

60,400  15 
217,414  85 
308,028  27 

69,753  97 

24,000  63 
2*9,733  97 
207,787  75 
148,277  14 
189,204  32 
142,790  99 

78,982  50 
253,691  54 
692,277  20 
115,984  51  j 
'    349,558  10  | 
370,256  59 
8,323,099  42  \ 
512,096  49  I 
220,310  53  I 
295,122  64 
287,658  15  I 
833,175  96 
263,412  85 
210,886  64 

48,096  48 
167,595  20 
314,787  58  ! 
430,451  09 
218, S33  24 

94,137  25  : 
175,620  69 

51,865  92 
256,416  12 
143.807  30 
185,731  78 
227.. '.00  70 
15::.6,mi  so 


3.055 
13.48 
4.614 
3.269 
3.495 
3.302 
2.726 
2.506 
5.863 
3.272 
2.411 
4.357 
5.492 
3.774 
3.805 
4.392 
3.870 
3.888 
4.958 
2.544 
8.113 
4.830 
1.650 
4.442 
13.6 
3.369 
3.463 
5.156 
6.782 
4.705 
2.785 
4.384 
2.781 
3.684 
3.740 
4.883 
2.071 
3.153 
4.283 
2.800 
2.452 
2.562 
2.402 
2.730 
5.706 
2.451 
2.425 
2.136 
2.904 
3.175 
2.392 
8.973 
3.499 
4.292 
5.347 
3.585 
3.366 


$10,210  00  $745,001  96  $24,366,184  46  *3.057 


♦Average. 


Total  taxes  collected,  exclusive  of  taxes  on  railroads  paid  on 
the  assessment  made  by  the  State  Board  of  Equalization 

Total  cost  of  collecting  these  taxes 

Average  cost  of  collection 


$24,366,184  46 

745,001  96 

3.057% 


286  REPORT   OF    COMMISSION   ON   REVENUE   AND   TAXATION. 


CHAPTER  XI. 


STATE  LICENSE  TAXES. 


License  taxes  used  as  sources  of  State  revenue. 

Many  of  the  Southern  states  of  the  Union  make  extensive  use  of 
license  taxes  to  supply  revenues  for  the  State  government.  Tennessee 
affords  a  typical  example  of  this  class  of  taxes.  In  that  State  license 
taxes,  called  "  privilege  taxes,"  are  levied  upon  almost  every  class  of 
industry  and  occupation.  In  the  "tax  digest"  of  Tennessee,  it  takes 
nearly  forty  pages  of  fine  print  to  merely  enumerate  these  taxes  with 
the  rates.  The  following  is  a  list  of  the  principal  occupations  covered: 
Abstract  companies,  advertising  companies,  amusements  (such  as 
circuses  and  menageries),  artists  and  photographers,  auctioneers,  barbe- 
cues, picnics  and  festivals,  baseball  parks,  breweries,  bill-posters,  billiard 
tables,  bicycles,  bookmakers,  bottlers,  brokers,  butchers  (wholesale  and 
retail),  cigar  stands,  check  rooms,  pressing  and  dyeing  establishments, 
dealers  in  coal  and  coke,  dealers  in  coal  oil,  etc.;  collection  agencies, 
commercial,  mercantile  or  protective  agencies;  construction  companies, 
cotton-seed  oil  mills,  cotton  compressors,  cotton  factories,  distillers  of 
whisky,  distillers  of  brandy,  dealers  in  theater  tickets;  eating  or  lunch 
houses,  or  stands  or  wagons;  elevators,  electric  light  companies,  feather 
renovators,  dealers  in  fees,  ferries,  flying  jennies,  fortune-tellers,  fruit 
stands,  dealers  in  futures,  games,  gas  companies,  hotels  or  taverns, 
summer  resorts,  hucksters,  dealers  in  ice,  intelligence  offices,  itinerant 
vendors  of  all  sorts,  land  stock  companies,  laundries,  lightning-rod 
dealers,  lighting  companies,  liquor  dealers;  livery,  sale  and  feed  stables; 
lumber  dealers,  litigation  or  suits,  nickel-in-the-slot  machines,  parks, 
pawnbrokers,  dealers  in  playing  cards,  peddlers,  race  track  associa- 
tions, phonographs,  poolrooms,  pool  tables,  plumbers  and  gasfitters, 
dealers  in  ranges  and  clocks,  real  estate  dealers,  parcel  cars,  railroad 
ticket  agents  and  scalpers,  restaurants,  stock  yards,  stock  pens,  etc.; 
sewing-machine  dealers  and  companies,  security  dealers  and  loan 
agents,  street  car  companies  and  dummy  railroads,  skating  rinks,  ten- 
pin  alleys,  theaters,  transfer  companies,  turnpikes,  undertakers,  variety 
shows,  warehouses,  water  companies,  express  companies,  sleeping-car 
companies,  news  companies,  railroad  companies,  trading-stamp  com- 
panies  and   merchants  issuing  trading  stamps,  telegraph  companies, 


REPORT   OP    COMMISSION   ON   REVENUE   AND   TAXATION.  287 

terminal  companies,  telephone  companies,  insurance  agents,  and  a  few 
others.  The  rates  range  from  $1  to  $2,500,  according  to  the  character 
of  the  business,  the  size  of  the  town  or  city  in  which  it  is  conducted 
and  other  characteristics.  All  of  this  elaborate  system  is  carefully 
adjusted  to  the  other  taxes  that  may  fall  upon  the  same  industries  or 
pursuits.  The  revenue  obtained  by  Tennessee  from  this  source  is  over 
$500,000  annually. 

In  the  early  days,  before  California  lost  her  Southern  traditions, 
there  were  similar  taxes  here.  There  is  nothing  to  prevent  their 
revival,  and  they  may  be  accounted  among  the  possibilities.  It  is  fully 
within  the  power  of  the  Legislature  to  levy  such  license  taxes  without 
any  change  in  the  Constitution. 

Northern  states  do  not  use  license  taxes  to  anything  like  the  same 
extent  as  do  the  Southern  states.  But  many  of  the  Northern  states  do 
levy  some  license  taxes  for  State  purposes.  The  most  common  subject 
for  license  taxes,  and  the  most  productive  of  revenue,  is  the  business  of 
dealing  in  liquors,  spirituous,  vinous,  and  malt.  New  York  obtains 
from  this  source  for  State  purposes  about  $10,000,000  per  annum. 

No  specific  recommendations  made  in  regard  to  license  taxes. 

The  Commission  does  not  desire  to  make  any  specific  recommenda- 
tions in  regard  to  license  taxes,  but  simply  to  point  out  that  they 
offer  a  source  of  revenue,  easy  of  collection,  which  may  well  be  used  to 
supplement  the  other  sources. 

Time  not  ripe  for  general  license  tax  system  in  California. 

Probably  the  time  is  not  ripe  for  a  general  system  of  license  taxes  on 
occupations  of  all  sorts,  at  all  similar  to  that  used  in  the  Southern 
states  and  exemplified  in  Tennessee's  system,  above  cited.  The  advan- 
tages of  such  a  system  are  many  and  obvious.  Such  taxes  supplement 
the  property  taxes  and  reach  many  industries  which  can  be  adequately 
taxed  in  no  other  way.  It  is  possible  that  at  some  future  time  it  may 
be  felt  to  be  necessary,  in  order  to  bring  about  an  equitable  distribution 
of  the  burden  of  taxation,  to  introduce  such  taxes. 

Taxes  on  the  business  of  dealing"  in  liquors. 

The  advantages  and  disadvantages  of  taxes  on  the  liquor  traffic  are 
so  constantly  discussed  that  every  one,  presumably,  has  a  settled  con- 
viction, or  at  least  a  prejudice,  on  that  subject.  The  questions  involved 
are  not  of  a  purely  fiscal  character.  Even  if  levied  primarily  for  reve- 
nue purposes,  such  taxes  involve  an  industry  the  control  of  which  has 
long  been  a  matter  of  social  solicitude.  Around  this  industry,  when 
engaged  in  in  certain  forms,  cluster  many  of  the  vices  which  lead  to 
crime,  and  which  help  to  fill  our  prisons  and  asylums.     These  consti- 


288  REPORT   OP    COMMISSION   ON   REVENUE   AND   TAXATION. 

tute  together  one  of  the  greatest  of  the  State's  expenses.  There  seems 
to  be  no  impropriety  in  asking,  from  this  industry,  some  assistance  in 
meeting  the  special  State  expenses  which  it  directly  or  indirectly  causes. 

State  liquor  taxes  will  not  interfere  with  local  control. 

A  State  liquor  license  tax  need  not  interfere  with  local  liquor  license 
taxes,  nor  with  local  option,  nor  with  local  regulation  of  that  business. 
A  Federal  liquor  license,  so  called,  carries  no  permission  to  sell  liquor 
in  cities  or  towns  where  that  privilege  is  denied  by  local  ordinance. 
The  suggested  State  tax  would  in  this  respect  be  much  the  same  as  the 
Federal  tax.  It  would  be  a  tax  on  liquor  dealers,  not  a  general  per- 
missive license.  Yet,  of  course,  it  would  be  necessary,  in  order  to 
enforce  the  collection,  to  make  it  illegal  to  sell  liquor  unless  a  State 
license  were  obtained. 

4 

The  New  York  liquor  tax  law  recommended  as  a  model. 

Should  the  Legislature  wish  to  enact  such  a  liquor  tax  law  for  Cali- 
fornia, the  Commission  recommends  that  it  be  modeled  on  the  New 
York  liquor  tax  law,  but  with  lower  rates.  That  law  is  the  result  of 
years  of  experiment  and  trial;  it  has  been  thoroughly  tested  in  the 
courts;  it  is  a  tax  law  primarily  and  not,  as  in  some  other  states,  a 
quasi-prohibition  law.  Furthermore,  the  classification  and  definitions 
used  in  it  fit  our  California  conditions  to  a  remarkable  degree.  It  taxes 
retail  liquor  traffic  only,  not  wholesale  traffic,  distillers,  nor  brewers. 
Among  its  other  advantages  is  the  fact  that  it  permits  of  a  very  low 
tax — not  more  than  is  necessary  to  enforce  registration,  which  is 
required  in  order  to  prevent  evasion — on  the  small  grower  who  sells  his 
own  product. 

The  administrative  features  of  the  New  York  law  are  probably  too 
cumbersome  and  too  expensive  to  be  copied  in  California.  They  are 
designed  for  the  administration  of  a  system  far  larger  and  at  rates  far 
higher  than  are  desirable  here.  It  is  probable  that  any  California  State 
liquor  taxes  which  might  be  imposed  could  be  collected  by  the  sheriffs 
under  direct  supervision  of  the  State  Controller,  subject  to  the  approval 
of  the  State  Board  of  Equalization.  No  other  machinery  seems  nec- 
essary. 

Definitions,  grades  of  licenses  and  rates. 

If  a  liquor  tax  law  is  to  be  considered,  the  Commission  would  recom- 
mend that  it  be  constructed  on  the  basis  of  the  following  definitions  and 
rates  adapted  from  the  New  York  liquor  tax  law : 

Definitions.- — The  term  "liquors,"  as  used  in  this  act,  includes  and  means  all 
distilled  or  rectified  spirits,  wine,  fermented  and  malt  liquors.  -''Trafficking  in 
liquors,"  within  the  meaning  of  this  act,  is  : 

1.  A  sale  of  less  than  five  wine  gallons  of  liquor  ;  or, 


REPORT   OF    COMMISSION   ON   REVENUE   AND   TAXATION.  289 

2.  A  sale  of  five  wine  gallons  or  more  of  liquor,  in  which  less  than  five  gallons 
of  any  one  kind  and  quality  is  included  ;  or, 

3.  A  sale  of  five  wine  gallons  or  more  of  liquor,  any  portion  of  which  is  intended 
or  permitted  to  be  drunk  on  the  premises  whore  sold ;  or, 

4.  A  sale  of  five  wine  gallons  or  more  of  liquor,  when  the  liquor  so  sold  is  delivered, 
or  agreed  to  be  delivered,  in  a  less  quantity  than  five  wine  gallons  at  one  time ;  or, 

."..  The  distribution  of  liquor  by,  between  or  on  behalf  of  members  of  a  corporation, 
association  or  co-partnership,  to  a  member  thereof  or  to  others,  in  quantities  less 
than   five  wine  gallons ;   or, 

6.  The  sale  of  less  than  five  wine  gallons  of  any  preparation,  compound  or  sub- 
stance consisting  in  whole  or  in  part  of  distilled  or  rectified  spirits,  wine,  fermented 
or  malt  liquors,  which,  under  the  rulings  and  decisions  of  the  United  States  internal 
revenue  department  requires  the  payment  of  a  retail  liquor  dealer's  or  retail  malt 
liquor  dealer's  special  United  States  internal  revenue  tax,  by  any  person  who  has 
paid  such  tax  for  the  place  of  such  sale,  and  for  the  period  in  which  the  same 
occurs,  or  by  any  person  whomsoever  in  a  place  for  which  such  tax  has  been  paid, 
and  in  which  a  retail  liquor  dealer's  or  a  retail  malt  liquor  dealer's  special  United 
States  internal  revenue  tax  stamp  in  force  and  effect  is  maintained  or  posted. 

The  Commission  recommends  seven  grades  of  license  taxes,  with  rates 

varying  according  to  the  size  of  the  place  where  the  traffic  is  conducted, 

as  follows: 

GRADE  1.  Upon  the  business  of  trafficking  in  liquors  to  be  drunk  where  sold, 
or  which  are  so  drunk,  whether  in  a  hotel,  restaurant,  saloon,  store,  shop,  booth,  or 
other  place,  or  in  any  outbuilding,  yard,  or  garden  appertaining  thereto  or  connected 
therewith,  there  is  assessed  an  excise  tax  to  be  paid  by  every  corporation,  association, 
co-partnership,  or  person  engaged  in  such  traffic,  and  for  each  such  place  where  such 
traffic  is  carried  on  by  such  corporation,  association,  co-partnership  or  person  if  the 
same  be  in  a  city,  city  and  county,  or  other  municipality  having  by  the  last  United 
States  census  a  population  of : 

Over  200,000   inhabitants $  100  00 

Over   100,000  and  not  over  200,000 90  00 

Over     30,000  and  not  over  100,000 75  00 

Over     15,000  and  not  over     30,000 50  00 

Over     10,000  and  not  over     15,000 40  00 

Over       3,000  and  not  over     10,000 30  00 

3,000  or  less -°  °° 

If  in  any  other  place 10  00 

The  holder  of  a  liquor  tax  certificate  of  this  grade  is  entitled  also  to  traffic   in 
liquors  as  though  he  held  a  liquor  tax  certificate  of  grade  2. 

GRADE  2.  Upon  the  business  of  trafficking  in  liquors  in  quantities  less  than  live 
wine  gallons,  no  part  of  which  shall  be  drunk  on  the  premises  where  sold,  or  in  any 
outbuilding,  yard,  booth,  or  garden  appertaining  thereto  or  connected  therewith, 
there  is  assessed  an  excise  tax  to  be  paid  by  every  corporation,  association,  co-partner- 
ship, or  person  engaged  in  such  traffic,  and  for  each  place  where  such  traffic  is 
carried  on  by  such  corporation,  association,  co-partnership,  or  person,  if  the  same  be 
in  a  city,  city  and  county,  or  other  municipality  having  by  the  last  United  Si 
census  a  population  of : 

Over  200,000  inhabitants -1?"' 

Over  100,000  and  not  over  200,000 45  00 

Over     30,000  and  not  over  100.000 37  00 

Over     1.1,000  and  not  over    30,000 25  00 

Over     10.000  and  not  over     15,000 '-'"  ' " ' 

Over       3,000  and  not  over     10,< i: 

3,000  or  less 1<J  ] 

If  in  any  other  place •'  "" 

19  — RT 


290  REPORT   OP    COMMISSION    ON    REVENUE   AND    TAXATION. 

GRADE  •">.  Upon  the  business  of  trafficking  in  liquors  by  a  duly  licensed  pharma- 
cist, which  liquors  can  only  be  sold  upon  the  written  prescription  of  a  regularly 
licensed  physician,  signed  by  such  physician,  which  prescription  shall  state  the  name 
of  the  person  for  whom  prescribed,  and  the  date  of  the  prescription,  and  shall  be 
preserved  by  the  vendor,  pasted  in  a  book  kept  for  that  purpose,  and  be  but  once 
tilled,  and  which  liquors  shall  not  be  drunk  on  the  premises  where  sold,  or  in  any 
outbuilding,  yard,  booth,  or  garden  appertaining  thereto  or  connected  therewith, 
there  is  assessed  an  excise  tax  to  be  paid  by  such  duly  licensed  pharmacist  or  the 
corporation,  association,  or  co-partnership  of  which  he  is  a  member,  engaged  in  such 
traffic,  and  for  each  such  place  where  such  traffic  is  carried  on  by  such  pharmacist, 
or  by  such  corporation,  association,  or  co-partnership  of  which  he  is  a  member,  the 
sum  of  seven  and  one  half  dollars.  The  holder  of  a  liquor  tax  certificate  under  this 
subdivision  may  sell  alcohol,  to  be  used  for  medicinal  or  mechanical  purposes,  without 
a  prescription,  except  during  any  prohibited  hours. 

GRADE  4.  Upon  the  business  of  trafficking  in  liquors  upon  any  car,  steamboat,  or 
vessel  within  this  State,  to  be  drunk  on  such  car  or  on  any  car  connected  therewith, 
or  on  such  steamboat  or  vessel,  or  upon  any  boat  or  barge  attached  thereto  or 
connected  therewith,  there  is  assessed  an  excise  tax,  to  be  paid  by  every  corporation, 
association,  co-partnership,  or  person  engaged  in  such  traffic,  and  for  each  car, 
steamboat  or  vessel,  boat  or  barge,  upon  which  such  traffic  is  carried  on,  the  sum 
of  fifty  dollars. 

GRADE  5.  The  holder  of  a  liquor  tax  certificate  under  subdivision  two  of 
section  four  of  this  act,  who  is  engaged  in  the  business  of  bottling  malt  liquors,  or 
who  bottles  the  same,  and  who  sells  such  malt  liquors  at  any  place  other  than  that 
stated  in  such  liquor  tax  certificate,  in  quantities  of  less  than  five  wine  gallons, 
may  sell  and  deliver  from  a  vehicle  to  the  occupant  of  a  store  or  other  building  at 
such  place  of  occupancy,  malt  liquors  in  bottles  in  a  quantity  of  less  than  five  wine 
gallons,  but  of  not  less  than  three  gallons  (or  twenty-four  pint  bottles)  at  a  time; 
provided,  he  shall  have  obtained  for  each  vehicle  from  which  he  so  sells  and  delivers 
a  special  tax  certificate  permitting  such  traffic  from  such  vehicle.  There  is  assessed 
for  each  vehicle  so  employed  an  excise  liquor  tax  of  one  dollar.  The  Controller  of 
State  shall  prepare  and  issue  such  special  liquor  tax  certificate  as  shall  be  necessary 
to  carry  out  the  provisions  of  this  subdivision,  and  such  certificate  shall  at  all  times 
be  carried  with  each  such  vehicle,  or  posted  therein  or  thereon,  in  such  manner 
as  the  Controller  of  State  shall  direct.  No  sale  or  delivery  of  malt  liquor  under  the 
provisions  of  this  subdivision  shall  be  permitted  in  any  town  in  which  the  sale  of 
liquor   is  prohibited. 

GRADE  G.  Upon  the  business  of  trafficking  in  alcohol  in  quantities  of  less  than 
five  gallons,  which  alcohol  can  only  be  sold  between  the  hours  of  seven  o'clock  in 
the  morning  and  seven  o'clock  in  the  evening,  on  any  day  except  Sunday,  for  use  for 
mechanical,  medicinal,  or  scientific  purposes,  by  dealers  who  neither  keep  nor  sell 
any  liquors  of  any  kind  other  than  alcohol,  there  is  assessed  an  excise  tax  to  be 
paid  by  every  corporation,  association,  co-partnership,  or  person  engaged  in  such 
traffic,  and  for  each  place  where  such  traffic  is  carried  on  by  such  corporation,  asso- 
ciation, co-partnership,  or  person,  if  the  same  be  in  a  city  having  by  the  last  United 
States  census  a  population  of  thirty  thousand  or  more,  the  sum  of  ten  dollars ;  of 
less  than  thirty  thousand,  the  sum  of  five  dollars. 

GRADE  7.  Upon  the  business  of  trafficking  in  liquors  in  quantities  of  less  than 
five  wine  gallons,  but  not  less  than  one  wine  gallon,  in  any  place  other  than  a  city 
having,  by  the  last  United  States  census,  a  population  of  five  thousand  or  more,  by  a 
grower  of  fruit,  such  liquor  having  been  manufactured  by  such  grower  from  fruit  of 
his  own  growing,  no  part  of  which  liquor  so  sold  is  to  be  drunk  on  the  premises  where 
sold,  or  in  any  outbuilding,  yard,  booth,  or  garden  appertaining  thereto  or  connected 
therewith,  there  is  assessed  an  excise  tax  to  be  paid  by  every  corporation,  association, 
co-partnership,  or  person  engaged  in  such  traffic,  and  for  each  place  where  such  traffic- 
is  carried  on,  the  sum  of  five  dollars  for  each  excise  year,  or  any  part  thereof,  during 
which  such  traffic  is  carried  on,  and  no  liquor  tax  certificate  of  this  grade  shall  be 
transferred  or  assigned  and  no  rebate  shall  be  allowed  or  paid  upon  surrender  or 
cancellation   thereof. 


INDEX. 

Act  authorizing  Commission,  3. 

Adams,  H.  C,  railroad  taxation,  155;  Michigan  Tax  Commission,  13(5,  138. 

Ad   valorem  tax  (See  also  General  property  tax  and  Property  tax):  interstate  carriers,  119; 

Michigan,  Wisconsin,  102;  on  railroads,  148;  railroads,  Michigan,  140. 
Agricultural  lands,  delinquent,  46. 
Alameda  &  San  Joaquin  R.  R.,  taxes  of,  104. 

Amendment  to  Constitution  proposed,  14;  purposes  of,  15;  notes  on,  21. 
Antiquated  system,  54. 
Appointment  of  Commission,  4. 
Assessors,  5,  44. 
Assessed  valuation,  per  capita,  34;  chart,  35;  banks,  251. 

Assessment,  annual,  32;  municipal,  32;  money  and  solvent  credits,  56;  of  property,  33; 
of  railroads,  107;  roll,  34;  or  valuation,  38. 

Balch,  A.  C,  211. 

Bank  of  Calif,  vs.  S.  F.,  224. 

Bank,  stock,  book  value,  245. 

Bank  taxes,  New  York,  243;  proposed  plan,  244. 

Banks,  assessed  valuation,  etc.,  table,  251;  branch,  taxes  on,  20;  circular  letter  to,  252; 
earnings  of,  237;  foreign,  taxes  on,  20;  national,  taxes  on,  68;  private,  248;  pri- 
vate, taxes  on,  20;  proposed  taxes,  amount  of,  251;  savings,  taxes  on,  68;  State 
commercial,  taxes  on,  68;  tax  on  capital  stock,  12;  taxes  on,  13,  19;  taxation  of,  19; 
taxes  on  belong  to  State,  78;  taxation  of,  219;  taxation  of,  laws  of  other  states,  241. 

Board  of  State  Harbor  Commissioners,  52. 

Boca  &  Loyalton  R.  R.,  taxes  of,  104;  gross  earnings  of,  166;  present  taxes  and  gross 
earnings  tax,  170;  relative  taxes  on,  176. 

Book  value  of  bank  stock,  245. 

Broughton  Act,  12,  192. 

Business  taxes  and  licenses,  50. 

Car  companies  (See  also  special  classes),  41;    taxes  on,  13,  18;    present  taxes  on,  196; 

taxation  of,  196;  taxation  of  in  other  states,  199. 
Car-loaning  companies,  18. 
Capitalization,  rate  of,  98. 

Capital  stock,  taxes  (See  special  corporations);  of  railroads,  taxes  based  on,  113;  of 
railroads,  taxes  on,  148. 

California  and  Northwestern  R.  R.,  taxation  of,  104. 

Calif.  N.  W.  &  N.  S.  R.  R..  gross  earnings,  166;  present  taxes  and  gross  earnings,  170; 
relative  taxes  on,  176;  gross  earnings  and  net  earnings,  California,  177-8. 

California  railroads,  gross  earnings  of,  table,  166. 

Census  U.  S.,  1900,  on  farms,  63.  1900,  on  commercial  value  of  railroads,  181;  on  depre- 
ciation of  street  railroads,  186;  on  street  railroad  franchises,  189;  on  street  railroad 
values,  183. 

Chart,  Minnesota  railroad  taxes,  161;  showing  assessed  valuation,  California,  1850-1904, 
35;  Wisconsin  railroad  taxes,  163;  San  Francisco  valuation,  74;  for  computing  tax 
rates,  101. 

Chicago  &  N.  W.  Railway,  appraisal  of  in  Michigan,  139.       ' 

Circular  letter,  to  banks,  252. 

City  taxes,  69;  rate  of,  238;  table  of,  70-72. 

Clerk  of  the  Supreme  Court,  51. 

Collections,  by  State  institutions,  11-13;  by  State  boards,  52. 

Collection  of  taxes,  44;  cost  of,  283;  items  of  cost,  283;  saving  in  cost,  283;  table  of  cost 
to  counties,  285. 

Commission,  act  authorizing,  3;  appointment  of,  4;  Massachusetts  tax,  1897,  114;  Mis- 
souri, 273;  Washington,  65. 

Commercial  banks.  State,  10. 

Commercial  earnings,  State,  27,  53.  • 

Connecticut,  hank  taxis,  211  ;   railroad  taxes  in,  113,  149. 

Controller,  State,  5,   hi:;. 

Constitutional  amendment,  proposed,  14. 

Constitutionality  of  gross  earnings  tax,  railroads,  117;  car  companies,  199;  telegraph 
ami  telephone  Companies,  20!>. 

Cooley,  M.  E.,  Michigan  Tax  Commissioner,  135. 

"Corporate  Excess,"  268. 

Corporate  franchises,  268. 


292  INDEX. 

Corporation  taxes,  20,  49. 

Corporations,  taxes  on  (see  special  classes);  annual  license  tax,  30;  classification,  94; 
furnish  information,  5;  inequalities,  68;  public-service,  taxes  of  belong  to  State,  78; 
reports  to  the  Commission,  97;  shares  of  stock  in,  40;  taxes  paid  by  different  classes 
of,  68;  with  taxable  franchises,  267. 

Correspondence  of  Commission,  4. 

Cost,  of  collecting  taxes,  283;  of  State  government,  28. 

Counties  overburdened,  10. 

Creditors,  277. 

Credits,  not  property  in  economic  sense,  276;  untaxed  no  inequality,  278;  Wisconsin, 
Commission  in,  279.     See  also  Money  and  credits. 

Criticism  of  Preliminary  Report,  5. 

Curtin,  J.  B.,  appointment,  4. 

Dalrymple,  J.,  on  strict  railroad  accounts,  188. 

Debts,  deduction  of,  40;  deduction  of  a  failure,  279. 

Decisions  of  the  courts  with  relation  to  taxation  of  national  banks,  230-235. 

Definition,  of  gross  earnings,  174;  of  gross  earnings,  Maine,  171;  of  street  railroads,  182; 
of  express  companies,  192. 

Delinquent  tax  lands,  45. 

Delinquent  taxes,  agricultural  lands,  46. 

Depreciation  charges,  light,  heat  and  power  companies,  211;  ibid.,  applied,  212. 

Depreciation,   in  street  railroads,   186;   street  railroad   accounts,    Great  Britain,    188; 

allowance  for  in  street  railroad  accounts,  188;  telephone  companies,  208. 
Dining-car  companies,  taxes  on,  18. 
Dividends,  savings  banks,  238. 
Drawing-room  ear  companies,  taxes  on,  18. 
Dutton,  W.  J.,  255. 

Earnings,  of  banks,  237;  of  car  companies,  197;  of  public-service  companies  outside  of 
California.  97;  of  street  railroads,  per  mile,  190;  of  telegraph  and  telephone  com- 
panies, 206,  210. 

Earnings  tax  (See  also  Gross  earnings  and  Net  earnings  tax),  on  railroads,  116. 

Earnings,  taxation  of  railroads  based  on,  155. 

Easterday,  J.  H.,  Washington  Tax  Commissioner,  65. 

Effects  of  separation,  87. 

Electric  lighting  companies,  see  Light,  Heat  and  Power  companies. 

Equality  of  gross  earnings  tax  between  different  railroads,  179-80. 

Equal  taxation,  93. 

Equalization,  42;  County  Board  of,  43;  does  not  equalize,  10,  61;  State  Board  of,  5,  17, 

20.  39,  41,  43,  59,  103,  173,  271. 
Escheats,  53. 
Exemptions,  16,  37. 

Express  companies,  taxes  on,  13,  18,  41,  68,  192;  defined,  192;  license  taxes  on,  193; 
taxation  of  in  other  states,  194;  taxes  now  paid,  193. 

Farmers,  taxes  paid  by,  9. 

Farms,  definition  of,  64. 

Farm  taxation  at  the  present  time,  65. 

Farms  and  manufactures,  comparison  of  taxes,  65. 

Faults  in  the  old  system,  9.* 

Fees,  11;    collected  by  State  officers,  51;   for  filing  articles  of  incorporation,  262;    for 

incorporation  in  other  states,  262;  official,  State,  13;  yield  of,  26. 
Fernald,  Mr.,  of  Pullman  Company,  200. 
Fireman's  Fund  Insurance  Company,  255. 
Foreign  corporations,  see  special  classes. 
Forestable  lands,  delinquent,  46. 
Forest  lands,  taxation  of,  47. 
Franchise,  payments  on  account  of,  96. 
Franchise,  "to  be,"  13,  262;  "to  do,"  taxation  of,  264. 

Franchises,  20,  41 ;  assessment  of,  58 ;  taxation  of,  262 ;  taxation  of  a  serious  question,  269 ; 
bank,  taxation  of,  223;  contract  payment  for  not  taxes,  192;  contract  payments  for, 
telephone  companies,  203;  corporate,  268;  corporate  in  general,  268;  corporate,  taxes 
on,  12;  taxes  on,  13,  18;  general  and  special,  266;  nature  of,  262;  popular  demand  for 
taxation  of,  270;  present  condition  unsatisfactory,  270;  solution  of  question  of  taxa- 
tion of,  12,  271;  special,  in  California,  268;  special'in  other  states,  267;  special,  tax  on 
in  New  York,  146;  street  railroad,  189;  taxable  as  property,  267. 

Franchise  tax,  annual,  11;  annual,  in  other  states,  265. 

Fruit  car  companies,  taxes  on,  18. 


INDEX. 


293 


Furniture,  fixtures,  etc.,  banks,  221. 

Gas  companies  (See  also  Light,  Ileal  and  Power  companies),  taxes  on,  18. 

General  corporation  tax,  Massachusetts,  114. 

General  property  tax  (See  also  Ad  valorem  tax  and  Property  tax),  9,  36;  on  railroads,  112; 
retained  for  school  purposes,  86;  yield  of,  26. 

Gifts,  escheats,  income  from,  53. 

Government,  State,  cost  of,  28. 

Great  Britain,  depreciation  in  street  railroad  accounts,  188. 

Grange,  State,  5. 

Gross  earnings,  approved  definition  of,  174;  California  railroads,  table,  1(56;  and  net 
earnings.  California  railroads,  178;  defined,  171;  definite  facts,  164;  definitions  of 
discussed,  172;  railroads,  156;  rate  equivalent  to  given  rate  on  property,  chart,  100; 
taxes  on,  18;  taxes,  California,  results  compared  with  taxes  paid,  167. 

Gross  earnings  tax,  12;  constitutionality  of,  117;  effect  on  different  railroads,  174: 
express  companies,  194;  growth  of  illustrated,  L65;  increases,  L60;  justice  and 
equality  of,  92;  light,  heat  and  power  companies,  213;  practical  advantages,  92; 
compared  with  property  tax,  160;  on  railroads,  148;  on  railroads,  advantages  of,  L59; 
on  railroads  as  supplementary  tax,  129;  on  railroads,  in  other  states,  127;  on  rail- 
roads Michigan,  141;  on  railroads,  Wisconsin,  141;  recommended,  91;  on  street 
railroads.  184;  Texas,  144;  in  theory  and  practice,  91;  to  determine  rates,  93. 

Gross  premiums,  rate  on,  259. 
Gualala  Mill  R.  R.,  taxes  of,  104. 
Harbor  Commissioners,  State  Board  of,  52. 
Hardships,  taxation  of  banks,  239. 
Hearings  held  by  Commission,  6. 

Illinois,  gross  earnings  tax  on  railroads,  145;  bank  taxes,  243. 
Illinois  Central  R.R.,  taxes  on,  160. 
Improvements  upon  land  defined,  36. 

Income,  amount  of  railroads',  156;  from  rental  of  State  property,  52. 
Income  tax,  14,  18,  50. 
Incongruities,  taxation  of  banks,  239. 
Incorporation,  fees  for  filing  articles,  262. 
Increase  in  tax  burden, 54. 
Indiana,  bank  taxes,  242. 

Inequalities,  between  counties,  62;  between  localities,  60;  cause  of,  62;  between  different 
classes  of  corporations,  68;  between  rural  and  urban  property,  63;  in  existing  sys- 
tem of  taxation,  9,  54. 
Inheritance  tax,  11,  13,  48;  yield  of,  26,  30. 
Institutions,  State,  collections  by,  11,  13,  26. 
Insurance  Commissioner,  51. 

Insurance  companies,  taxes  on,  19,49;  arguments  against  taxation,  257;  foreign,  254; 
local  licenses,  255;  necessity  of  State  control  in  taxation  of,  256;  present  taxes  not 
uniform,  254;  proper  method  of  taxation,  258;  rate  of  tax  on,  259;  taxation  of,  254; 
taxation  of  in  other  states,  260;  taxes  paid  under  present  system.  257. 

Insurance  industry,  extent  of,  256. 

Insurance  premiums,  tax  on,  11,  29. 

Insurance  taxes,  13. 

Interstate  carriers,  taxation  of  other  than  ad  valorem,  118. 

Interstate  Commerce  Commission,  report  on  railroad  taxes,  109,  110,  111. 

Interstate  commerce,  constitutionality  of  tax  on,  118. 

Investment  of  light,  heat  and  power  companies,  213. 

Iverson,  S.  G.,  128. 

Judson,  F.  N.,  122;  "  Power  of  Taxation,"  118. 

Jute  Revolving  Fund,  53. 

Lake  Tahoe  R.  R  ,  gross  earnings  of,  166;  gross  earnings  and  net  earnings,  California, 
177-8;  present  tax  and  gross  earnings  tax,  170;  relative  taxes  on,  1<6;  taxes  ot,  104. 

Lands,  State,  11;  sale  of,  27. 

Law,  present,  relating  to  taxation  of  hanks,  220. 

Licenses  and  business  taxes,  50. 

Licenses,  insurance  companies,  255;  local,  insurance  companies,  255. 

Licenses  taxes,  as  sources  of  State  revenue,  286;  California  not  ready  for,  l;s?  ;  on  cor- 
porations, 30;  on  express  companies,  193;  local  on  insurance  companies,  -'oo:  on 
liquor  no  interference  to  local  control,  288;  on  occupations,  286 ;  telephone  compa- 
nies, 202. 

Light,  heat  and  power  companies,  depreciation,  211-12;  investment  of,  213;  taxes  on, 
13,  68;   taxation  of,  210;  taxation  of  in  different  Btates,  215;   taxes  now  paid,  215. 

Liquor  licenses,  definitions,  grades  and  rates,  288. 


294  INDEX. 

Liquor,  tax,  13;  taxes,  287. 

Liquor  tax  law  of  New  York,  288. 

McCartney,  H.  S.  G.,  appointment,  4. 

Maine,  definition  of  gross  earnings,  171;  gross  earnings  tax  on  railroads,  124,  127. 

Manufactures,  taxes  of,  9;  taxes  on,  65. 

Maryland,  gross  earnings  tax  on  railroads,  127. 

Massachusetts,  bank  taxes,  242;  railroad  taxes  in,  113;  Tax  Commission,  114. 

Meetings  of  Commission,  4. 

Merchandise,  taxation  of,  58. 

Michigan,  ad  valorem  tax  on  railroads,  153,  162;  gross  earnings  tax  on  railroads,  130; 
railroad  appraisal.  136 ;  Tax  Commission,  report  of,  131 ;  taxation  of  railroads  in,  131. 

Mileage  of  railroads,  definition  of,  174. 

Minnesota,  gross  earnings  defined,  171;  gross  earnings  tax  on  railroads,  127,  161. 

Money  and  credits,  9,  272;  exclusion  of  as  taxable  property,  282;  false  swearing  in 
returns,  274;  law  a  dead  letter,  279;  origin  of  attempt  to  tax,  273;  reason  of  failure 
to  tax,  274;  recommendations  postponed,  281;  shifting  of  tax,  281;  table  of  per- 
centage in  roll  of  each  county,  272;  taxes  in  other  states,  273;  taxation  required,  272; 
tax  will  be  shifted,  275. 

Money  and  solvent  credits,  assessment  of,  56. 

Money,  taxes  on  to  banks,  222. 

Mortgage  tax  of  California,  275. 

Mortgage,  deed  of  trust,  etc.,  tax,  16. 

Mortgages,  taxation  of,  278;  taxation  of  to  banks,  226. 

National  banks,  decisions  of  court  relating  to  taxation  of,  230-5;  taxation  of,  226; 
untaxed,  9. 

National  bank  stock,  taxation  of  in  San  Francisco,  227. 

New  Jersey,  taxes  on  railroads,  147. 

New  York,  bank  taxes,  243;  gross  earnings  tax  on  railroads,  129;  taxes  on  i-ailroads 
in,  145. 

Net  earnings,  defined,  95;  of  railroads,  proportion  to  gross,  168;  street  railroads,  184; 

telephone  and  telegraph  companies,  207. 
Net  earnings  tax,  91;  difficulties,  91;  railroads'  objections  to,  157. 
Net  income  of  railroads,  156. 

Nevada,  Cal.  &  Ore.  &  Sierra  Valley  R,  R.,  gross  earnings  of,  166;  gross  earnings  and 
net  earnings,  California,  177-8;  present  taxes  and  gross  earnings  tax,  170;  relative 
taxes  on,    176;  taxes  of,  104. 

Nevada  County  Narrow-Gauge  R.  R.,  gross  earnings  of,  166;  gross  earnings  and  net 
earnings,  California,  177-8;  present  taxes  and  gross  earnings  tax,  170;  relative  taxes 
on,  176;  taxes  of,  104. 

Nomograph  for  computing  tax  rates,  101. 

North  Shore  R.  R.,  taxes  of,  104. 

Objects  of  the  Commission,  3. 

Ohio,  gross  earnings  tax  on  railroads,  121). 

Oil  car  companies,  taxes  on,  18. 

Oil  industry,  railroad  interest  in,  217. 

Oil  pipeline  companies,  216. 

Oil,  production  of  in  California,  216. 

Ontario  Commission,  on  railway  taxation,  92,  115,  117,  128. 

Operating  expenses,  light,  heat  and  power  companies,  210. 

Pacific  Coast  R.  R.,  taxes  of,  104;  gross  earnings  of,  166;  gross  earnings  and  net  earnings, 

California,  177-8;  present  taxes  and  gross  earnings  tax,  170;  relative  taxes  on,  176. 
Pajaro  Valley  Cons.  R.  R.,  gross  earnings  of,  166;  gross  and  net  earnings,  California, 

177-8;  present  taxes  and  gross  earnings  tax,  170;  relative  taxes  on,  176;  taxes  of,  104. 
Palace  car  companies,  taxes  on,  18. 
Payments,  annual,  on  account  of  franchise,  96. 

Pennsylvania,  bank  taxes,  212;  railroad  taxes  in,  116;  gross  earnings  tax  on  railroads,  130. 
Perjury,  10. 

Personal  property,  amount  of  on  roll,  9;  assessment  of,  57;    banks,  221;  defined,  37; 

miscellaneous  items,  59;  not  reached  by  present  system,  55. 
Pipelines,  oil,  in  California,  217. 
Plehn,  Carl  C,  appointment,  4. 

Poll  tax,  11,  13,  18;  county,  48;  State,  47;  yield  of,  26. 
Possessory  claims,  39. 
Pratt,  S.  E.,  on  stock  values,  149,  150. 
Preliminary  Report,  5;  criticism  of,  5. 
Present  system,  faults  in,  9. 


INDEX. 


295 


Private  banks,  248. 

Property,  credits  as,  276;  defined  and  classified,  36;  earnings  of  State,  11;  fair  rate  on, 

98;  State,  earnings  of,  27;  subject  to  taxation,  36. 
Property  tax  (See  also  General  property  tax  and  Ad  valorem  tax);  becomes  stationary, 
160-  general  31;  compared  with  gross  earnings  tax,  160;  inapplicable  to  express 
companies,   193;    is  on  things,  not  persons,  277;  on  railroads,  148;  on  street  rail- 
roads, 183. 
Proposals,  75. 
Proposed  amendment,  15. 
Proposed  taxes  on  banks,  244. 
Public-service  corporations,  taxes,  18. 

Pullman  Company,  5,  6,  41 ;  earnings  of,  198;  objects  to  taxation,  199;  present  taxes,  val- 
uation for,  196;  refuses  information,  197;  taxes  of,  104. 
Putnam,  T.  M.,  100. 

Railroads  (See  also  name  of  road);  general  property  tax  on,  112;  historical  survey  of 
fixation  of  in  California,  105;  income  account  of,  156;  present  system  of  taxing, 
103-  reassessment  of  in  California,  1884,  108;  steam,  taxes  paid,  table,  104;  taxation 
of  in  California,  103;  taxation  in  other  states,  109;  taxation  of  on  ad  valorem  plan, 
153;  taxes  on,  13,  18,  68;  taxes  on  belong  to  State,  77. 
Railroad  property,  assessment  of,  39,  107. 
Railroad  taxes,  47:  in  Connecticut,  113;  in  Massachusetts,  113;  in  Pennsylvania,  116; 

in  other  states,  summary  of,  148;  receipts  from,  109;  belong  to  State,  10. 
Rate,  of  capitalization,  98;  of  city  taxes,  238;  on  gross  earnings  equivalent  to  given 
rate  on  property,  chart,  101:  of  gross  earnings  tax,  express  companies,  195;  of  tax 
on  insurance  companies,  259;  on  property,  98;  of  gross  earnings  tax  on  railroads,  180; 
of  gross  earnings  tax  on  street  railroads,  191;  184;  of  taxation,  43;  of  tax,  com- 
puted, 95;  of  tax  on  telegraph  and  telephone  companies,  208. 
Rates,  average  tax,  43;  of  gross  earnings  tax,  83;  for  gross  earnings  taxes,  93;  19;  of 

taxation,  rural  and  city,  67;  liquor  license  tax,  289. 
Real  estate,  in  cities  and  country,  taxation  of,  66;  inequalities  in  assessment  of,  60;  of 

banks,  220. 
Realty,  defined,  36. 

Reassessment  of  railroads,  California,  1884,  108. 

Recommendations,  75;  liquor  tax,  288;  on  taxation  of  money  and  credits,  281 ;  not  un- 
tried novelties,  6;  of  separation,  86;  on  street  railroads,  191. 
Remedies,  for  evils  in  present  system  of  taxation,  11;  for  non-collection  of  delinquent 

taxes,  47. 
Refrigerator  car  companies,  taxes  on,  18. 
Rental  of  State  property,  52. 
Rents,  not  operatng  expenses,  96. 
Reports  made  to  Commission,  97. 
Retaliatory  law  for  insurance  companies,  254. 
Revenues,  California,  present,  analysis  of,  25;  sources  of,  25;  sources  proposed,  11;  of 

the  State,  25;  detail  analysis  of,  26;  estimate  of  under  Commission  plan,  13. 
Revenue  laws,  California,  analysis  of,  31;  California,  classification  of ,  31. 
Rio  Vista  Barbed  Wire  Telephone  Company,  201. 
Sale  of  State  lands,  income  from,  53. 
Salt  Lake  R.  R.,  gross  earnings,  166;  gross  and  net  earnings,  California,  177-8;  present 

taxes  and  gross  earnings  tax,  170;  taxes  of,  104. 
San  Francisco,  assessed  values  in,  73;  chart  of  assessed  valuation,  73;  taxation  in.  72. 
San  Francisco  National  Bank  vs.  Dodge,  228. 

San  Joaquin  and  Kings  River  Canal  and  Irrigation  Co.  vs.  Merced  Co.,  42. 
Santa  Fe,  gross  earnings,  166;  gross  and  net  earnings,  California,  177-8;   present  tax  and 
gross  earnings  tax.  170:  rate  of  capitalization  of  earnings,  98;  relative  taxes  on,  176; 
taxes  of.  104:   value  on  stoek  and  bond  plan,  152. 
Savings  and  Loan  Societies  (See  also  Banks,  savings),  19. 
Savings  banks,  10;  taxation  of,  225;  taxes  on,  9. 
Saving  to  real  estate  owners,  11. 
School  Fund,  52. 

School  moneys  not  properly  State  revenues,  27. 
School  tax  retained,  86. 
Secretary  of  State,  51. 
Sellg,  A.  L.,  211. 

Separate  city  assessment,  and  collection  unnecessary,  69;. origin  of.  69. 
Separation,  in  California,  s<i;  Connecticut.  84  ;  defined,  77:  effects  of ,  87 ;  effects  of ,  how 
computed,  87:  estimated  effects.  87;  first  step  in  reform,  ll:  for  the  common  good, 
88;  gain  or  loss  bv  counties.  88;  table  of  gain  or  loss,  89;  in  general.  , ,:  in  other 
states,  82;  Minnesota,  85 ;  New  York,  83;  Ohio,  84;  Pennsylvania, 83 ;  practical  con- 
siderations, 81;  prohibited,  14;  theoretical  considerations,  79. 


296  INDEX. 

Shifting  of  tax,  on  credits,  281 ;  on  money  and  credits,  281. 

Sierra  Ry.,  gross  earnings  of,  166;  gross  and  net  earnings  of,  California,  177-8;  present 
taxes  and  gross  earnings  tax,  170;  relative  taxes  on,  176;  taxes  of,  104. 

Sierra  Valleys  R.  R.,  taxes  of,  104. 

Sleeping  ear  companies,  taxes  on,  18. 

Solvent  credits,  taxation  of  to  banks,  222. 

Sources  of  revenue,  new,  29;  old  and  new,  11-12. 

Southern  Pacific  Company,  gross  earnings,  166;  gross  and  net  earnings,  California,  177-8; 
present  taxes  and  gross  earnings  tax,  170;  rate  of  capitalization  of  earnings,  98; 
relative  amount  of  taxes  on,  176;  value  on  stock  and  bond  plan,  151,  152. 

Southern  Pacific  R.  R.  System,  taxation  of,  104. 
S.  P.,  L.  A.,  &  Salt  Lake  R.  R.,  taxes  of,  104. 
Special  franchises,  tax  on  in  New  York,  146. 
Specific  tax  on  railroads,  Michigan,  131. 
Spring  Valley  Water  Company,  taxes  on,  68. 
State,  see  office,  association,  tax,  etc. 
State  control,  taxation  of  insurance  companies,  256. 

State  taxation,  of  telegraph  and  telephone  companies,  203;  of  water  companies,  216. 
State  University,  53. 

Statistical  investigation  on  taxation  of  banks,  250. 
Stock  car  companies,  taxes  on,  18. 

Stockton  Gas  and  Electric  Co.  vs.  County  of  San  Joaquin,  41. 
Stock  and  bond  tax,  railroads,  Connecticut,  149. 
Stocks,  bonds,  warrants,  taxation  of  to  banks,  221. 

Street  railroads,  definition  of,  182;  depreciation,  186-8;  net  earnings  of,  104;  subjects 
of  State  taxation,  182;  taxes  now  paid,  190;  taxation  of  in  other  states,  190;  taxes 
on,  13,  18,  68. 
Supervisors,  county,  50. 
Surveyor-General,  51. 
Taxation  of,  see  special  subjects. 
Taxation  of  banks,  in  other  states,  240. 
Tax  burden,  increase  in,  54. 
Tax  collectors,  5,  44. 
"Tax  inquisitors "  in  Ohio,  273. 
Taxes  on,  see  special  subjects. 
Taxes,   gross  earnings  tax,   144;   now   paid,  Light,  Heat  and  Power  companies,  215; 

present  on  banks,  219,  235. 
Telegraph  and  telephone  lines,  40. 

Telegraph  companies,  201;  taxation  of  in  different  states,  203;  taxes  on,  13,  18,  68. 
Telephone  companies,  201;  taxation  of  in  different  states,  205;  taxes  on,  13,  18,  68. 
Texas,  gross  earnings  tax  on  railroads,  144. 
Toll-roads,  40. 

Transportation  of  oil,  California,  218. 

Treadwell,  E.  F.,  appointment,  4;  on  constitutionality  taxation  interstate  carriers,  118. 
Trust  companies,  19;  taxes  on,  18. 
Undervaluation,  discussion  of,  99. 
Valuation,  see  Assessment  and  Assessed  valuation. 
Vermont,  gross  earnings  tax  on  railroads,  129. 
Vessels,  41. 
Virginia,  bank  taxes,   241;  constitution  of,  1902,  144;   railroad   taxes,  143;   separation 

in,  144. 
Ward,  M.  L.,  appointment,  4. 
Washington  Tax  Commission,  65. 

Water  companies,  215;  State  taxation  of,  216;  taxes  on,  68. 
Water  ditches,  39. 
Western  Pacific  (see   also   Boca   &   Loyalton;   Alameda  &  San  Joaquin),  taxes  of,  104  ; 

gross  and  net  earnings,  California,  177-8. 
Wisconsin,   ad  valorem  tax  on  railroads,  153;   ad  valorem  tax  on  railroads  in,  162; 
gross  earnings  tax  railroads,  130, 161 ;  taxation  of  railroads  in,  141 ;  Tax  Commission 
on  taxation  of  credits,  279. 
Work  of  Commission,  extent  of,  4. 


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